Sometimes Bigger Is Better
Republicans and Democrats are working together on an antitrust push against big tech. It will backfire big-time.
Mark Zuckerberg was having one of 2020's worst Zoom meetings. It was July 29, and one of the most influential men in the world was sitting, pale and perspiring, in a sparse white room getting attacked by members of Congress from both parties. Rep. Matt Gaetz, a Florida Republican and close ally of President Donald Trump, was scolding the Facebook CEO about the "content moderators that you employ [who] are out there disadvantaging conservative content."
But before Zuckerberg could offer much in the way of a response, he was attacked from the left, as Rhode Island Democrat Rep. David Cicilline castigated Zuckerberg for not taking down the same content. For Cicilline, "the problem is Facebook is profiting off and amplifying disinformation that harms others because it's profitable."
For good measure, Rep. Jim Sensenbrenner, a Wisconsin Republican, asked Zuckerberg why Facebook temporarily took down Donald Trump Jr.'s account over a post promoting hydroxychloroquine as a COVID-19 treatment. Zuckerberg pointed out that the incident happened on Twitter.
The House Judiciary Committee's Subcommittee on Antitrust, Commercial, and Administrative Law was holding a formal hearing with the CEOs of four of the nation's biggest technology companies as witnesses. The purpose of the hearing, as indicated by its title, was "examining the dominance of Amazon, Apple, Facebook, and Google." It was the sixth such hearing since last June, out of a series of seven. Ostensibly, Republican and Democratic lawmakers were on opposite sides of the issue. But as the hearing went on, it became clear that although they had very different views about how big tech companies should conduct their business, they shared a conclusion that some tech firms had grown too big and too powerful—and that the federal government must intervene.
The two parties took different routes to their verdicts. The new breed of populist Republicans are mostly concerned with regulating political speech in their party's favor. Democrats tend to be more concerned with the sheer size and power the bigger tech companies wield. But either way, as far as they were concerned, big tech was guilty as charged. And that verdict may coincide with legal consequences, as the Trump administration and state attorneys general begin to wage their own battles against the tech giants in federal courts.
On October 20, the U.S. Justice Department and a group of state A.G.s filed an antitrust lawsuit against Google alleging illegal dominance in online search and advertising. The Federal Trade Commission (FTC) will likely bring a case against Facebook before the end of the year. Amazon, Uber, Apple, and several other tech companies are all under some kind of regulatory scrutiny. Facebook dominates social media, and conservatives believe it is biased against them. Amazon is being criticized for selling self-branded products and giving them prominent virtual shelf space, even though nearly all major brick-and-mortar retailers and grocers do the same thing. Uber, the largest ride-sharing company before the pandemic, is the largest food delivery service during it. Software developers and regulators are critical of the 30 percent cut Apple typically pockets of App Store purchases.
In October, Democratic lawmakers on the House antitrust subcommittee released a report declaring that the four companies that appeared at the summer hearing were all anti-competitive in some way. "To put it simply," the report says in its opening, "companies that once were scrappy, underdog startups that challenged the status quo have become the kinds of monopolies we last saw in the era of oil barons and railroad tycoons."
The report's nostalgic callback to America's trustbusting yesteryear was not an accident: As technology companies have grown larger and more influential, so too have calls from both the left and the right to exercise more federal oversight over the platforms and services that have become the mortar of everyday life. Unfortunately, the bipartisan move to regulate is based on a series of faulty assumptions about what competition is and how markets should work. And it discounts or ignores the real consumer benefits these companies produce—often as a result of their size. Big tech has become a political target not because it has failed consumers but because it has served them too well.
Progressive Return to the Past
Today's antitrust champions often portray themselves as builders of a better future, one in which the vast power of big tech is tamed by government oversight. In his 2018 book The Curse of Bigness: Antitrust in the New Gilded Age (Columbia Global Reports), Columbia University law professor Timothy Wu, one of the modern antitrust movement's loudest proponents, wrote that antitrust regulations are a way to "give humans a fighting chance against corporations." For Wu, a backlash to the growth of companies like Facebook and Google was almost certain: "Some effort to revive the antitrust laws may be an inevitability in a nation founded on principles of anti-monopoly, equality, and decentralized power." The key word is revive.
Wu, along with other thinkers such as his Columbia colleague Lina Khan, organizations such as the Open Markets Institute and the American Antitrust Institute, and politicians such as Sen. Elizabeth Warren (D–Mass.), are all influenced by Progressive Era Supreme Court Justice Louis Brandeis, who believed that corporations could commit antitrust violations simply by growing too large. In fact, Wu's The Curse of Bigness takes its title from a famous essay in Brandeis' 1914 book Other People's Money and How the Bankers Use It, which argued that large corporations were inherently anti-competitive and "against the public interest."
The neo-Brandeisians' core argument is that for the last half-century, America has been doing antitrust wrong.
In the early 1900s, companies could be prosecuted for antitrust violations simply for being really, really big. Many of those companies grew by offering low prices, which was viewed as anticompetitive behavior. The war on bigness was, in a sense, a war on low prices.
Eventually, however, a group of economists, many associated with the University of Chicago, began to argue that this approach was misguided. Instead of focusing on bigness alone, antitrust should prioritize consumer welfare. Big was OK, as long as consumers benefited from it.
What today's neo-Brandeisians want is to replace the consumer welfare standard with something more akin to the old standard, which relied heavily on discretion and therefore had a lower threshold for enforcement. Rulings were essentially based on whatever judges thought was reasonable. This discretion-based approach is one reason antitrust enforcement has changed so much over the years, despite new legislation rarely being passed. It was helped by the fact that laws such as the Sherman Act and the Federal Trade Commission Act did not define key terms like monopoly, restraint of trade, or unfair or deceptive act or practice. Regulators and judges were left to come up with their own definitions, which could vary from case to case to suit their needs.
This lack of predictability is one reason legal norms gradually shifted to the more stable consumer welfare standard, which requires proof of consumer harm.
The GOP's Internal Antitrust Division
The most prominent neo-Brandeisians hail almost entirely from the political left. Historically, at least, the right has preferred the consumer welfare standard that has prevailed in recent decades. But in recent years, the GOP has developed its own internal split. And the party is likely to become even more divided over time.
In his opening remarks at the July hearing, Sensenbrenner said that "antitrust law and the consumer welfare standard has served this country well for a century" and that "we must ensure our existing antitrust laws are primed to meet the needs of this country and its consumers."
But Sensenbrenner is 77 and retiring after this term, and many of the Republicans who are replacing older members like him don't share his view. Most young Republicans are not as outlandish as the new guard's Gaetz, who despite a short career has a long history of making controversial remarks. But young GOPers are frequently closer to Gaetz's antitrust activism than to Sensenbrenner's restraint, especially when it comes to fighting what many perceive to be an anti-conservative bias baked into the culture of the country's largest tech companies.
Many Republicans, including Missouri Sen. Josh Hawley, President Trump, and Attorney General William Barr, also want to repeal Section 230 of the Communications Decency Act, a provision that gives technology companies immunity against being prosecuted for content that users post on their platforms. This is a strange stance for Republicans, who often argue that guns don't kill people; people do. The same logic holds for online platforms: Twitter and Facebook don't produce legally objectionable speech, though sometimes their users do.
Although these issues are wrapped up in antitrust complaints, they are, in a very real sense, attempts to control online expression. This push to regulate political speech shows that Republicans have forgotten a cardinal rule of politics: Do not give yourself powers you do not want your opponent to have. If the GOP succeeds in changing tech companies' content policies in its favor, Democrats will almost certainly use those same powers against Republicans whenever power changes hands.
There are other likely consequences as well. Ironically, if Section 230 were repealed, it would help to lock in the dominance of the very companies Trump-era Republicans want to cut down to size. While Facebook and Twitter can afford to hire armies of content moderators and algorithm designers, the small startups that could potentially turn Facebook into the next MySpace don't have the same resources. They would effectively be shut out of the marketplace by regulatory barriers. Consumers face a very real prospect of losing access to more choices and new products.
The first case to be filed in the Trump era was against Google for its dominance in search and search advertising. A Facebook case may follow by the end of 2020, over Facebook's acquisitions of Instagram, WhatsApp, and other companies. And both Apple and Amazon are under investigation.
Concern about big business is nothing new, of course. Just about every tech company above a certain size can expect some level of antitrust scrutiny. What makes these cases different is that the allegedly small-government Republican Party is behind them.
A More Realistic Antitrust Policy
The bipartisan push to regulate big tech means that almost any election result is likely to produce further investigations and moves to regulate. Yet both Republicans and Democrats are proceeding from faulty premises and mistaken notions about how antitrust should be applied. So as these debates continue, it's worth keeping a few ideas in mind:
Not everything is an antitrust issue: The new antitrust motto appears to be "Ready, Fire, Aim!" Content moderation is certainly not an antitrust issue, but Republicans are trying to turn it into one. And many traditional media companies are upset that they can't charge the same high prices for ads they used to due to online competition. Increased competition is by definition not an antitrust issue—quite the opposite in fact. Newspapers have even asked for an exemption from antitrust laws in their industry so they can combine forces and better compete against Google and Facebook for ad revenue. "I typically would argue that such exemptions are anticompetitive," former USA Today Editor in Chief Joanne Lipman wrote last year. "But the truth is, nothing has been more anticompetitive for the news business in recent years than the digital platforms."
Worse, this focus on antitrust as a blunt cure-all for all sorts of problems distracts from real, more effective policy solutions. Airlines, at least pre-COVID, were indeed becoming more concentrated. But the solution is to lift the regulatory ban on foreign airlines serving domestic routes, not to ratchet up antitrust enforcement. Hospitals and pharmaceutical companies are becoming bigger and more consolidated. The solution is to reduce the massive regulatory and paperwork burdens that keep small startups out of the market. Big agribusinesses are the result of America's mishmash of protectionism, price controls, and farm subsidies. Reform those diseases, rather than treating the symptoms with antitrust cases. Antitrust lawsuits should be a last resort or no resort, not a first resort.
Politicians are no angels: In 1969, economist Harold Demsetz published a famous article about the nirvana fallacy, which arises when comparing real-world shortcomings to an idealized Utopian solution. Today's antitrust discussions are shot through with this error.
Yes, markets are imperfect, but that does not mean that government interventions can produce perfect outcomes, in part because real-world governments are run by flawed people like President Donald Trump and House Speaker Nancy Pelosi (D–Calif.). Cases get chosen—or not chosen—for political reasons. Trump, for example, has said that Google, Facebook, and Amazon are in a "very antitrust situation," though not because of their size or any alleged consumer harm. He believes Google and Facebook are biased against him, and Amazon founder Jeff Bezos also owns The Washington Post, which is often critical of Trump, though Amazon and the Post are separate companies. A few rungs -further down, the lawyers and judges handling high-profile antitrust cases often act with their career path in mind. Rather than pursuing justice, they may be pursuing a lucrative position at a white-shoe law firm, a higher appointment, or even elected office.
Antitrust is driven by cronyism and regulatory capture: Cronyism was baked into antitrust regulation from the start. Before the 1890 Sherman Act was passed, there was a burst of state-level antitrust legislation in the 1880s. Not coincidentally, this was exactly when two new technologies were revolutionizing the food industry: rails and refrigeration. The late Calestous Juma, a Kenyan-born historian of technology who taught at Harvard, observed in his 2016 book Innovation and Its Enemies (Oxford University Press) that fast shipping and reliable preservation helped larger producers get more food to more people more cheaply. Smaller farmers couldn't match the low prices, so they lobbied to block the new technology instead.
This anti-competitive lobbying effort resulted in the very first antitrust laws, as George Mason University economist Don Boudreaux and others have shown. For example, the Missouri branch of the Farmers Alliance convinced 140 out of 174 state senators and representatives to sign a pledge card promising, among other things, to support antitrust legislation. By the time the federal Sherman Act passed in 1890, 17 states had already passed their own antitrust bills. By 1893, 24 states had.
Cronyism continues to be a problem in the modern era. One of the leading boosters of the 1990s antitrust case against Microsoft was its competitor Oracle and that company's home state senator, the Utah Republican Orrin Hatch. Oracle went as far as to hire its own private investigators to assist the prosecution. According to a report by the Los Angeles Times, the investigators' tactics included attempting to pay a pro-Microsoft group's janitors to hand over their office trash.
When questioned about this, Oracle CEO Larry Ellison said, "All we did is try to take information that was hidden and bring it to light. I don't think that was arrogance. I think it was a public service."
Antitrust is built on uncertainty and incoherence: It's a good thing antitrust laws aren't enforced literally. By the letter of the law, every business transaction is potentially illegal.
If a company charges a higher price than its competitors, it can be charged with abusing monopoly power. If it charges the same price as competitors, it can be charged with collusion. And if it charges lower prices than competitors, it can be charged with predatory pricing.
If a law is enforced essentially by feel or instinct, it is probably not a good law. Yet this is exactly how antitrust law works. Overly broad terms with definitions that can change with each court case are a recipe for politically motivated abuse. Vague laws are also an invitation for increased corporate lobbying to avoid that abuse or, even more troublingly, to weaponize it against competitors.
Relevant markets are often defined too narrowly: This is the "relevant market fallacy," and it is at the heart of the Google case. Regulators and activists very often define a company's relevant market—the market within which the company is competing—too narrowly. This makes big companies look more powerful and more monopolistic than they really are.
When Sirius and XM merged in 2008, for example, critics argued that the combined company would monopolize satellite radio. But this is hardly the entire relevant market. SiriusXM has plenty of competition to this day—from terrestrial radio, on-demand streaming services such as Spotify, podcasts, audiobooks, and more.
At the July antitrust hearing, Cicilline pointed to Google's 85 percent market share of internet searches as evidence of monopoly power. He was almost certainly defining the market too narrowly. The Justice Department's complaint uses the boutique term "general search" in order to exclude other common internet searches people perform every day.
Consider Netflix, which famously hosted an open contest to design an algorithm that would give good movie recommendations to its customers. Google did not win the $1 million prize; instead, the victor was BellKor's Pragmatic Chaos, a seven-programmer collective with a name befitting a pub trivia team. Amazon's product searches do not use Google technology. Neither do eBay's. Online dating services compete with each other based on proprietary search algorithms for matching users. Internet search is much broader than Google—unless, of course, you define it as nothing more than what Google does.
Nor is Google's current market share baked in for good. The privacy-focused search engine DuckDuckGo has been averaging roughly 30 percent annual traffic growth since 2010, despite Google making its search engine the default for Android phones and paying Apple as much as $12 billion to make Google search the iOS default. In a similar antitrust story that's already been litigated, Microsoft years ago made its Internet Explorer browser the default option in Windows. The strategy did not succeed. Internet Explorer was long ago overtaken by a succession of competitors, from Netscape to Firefox to—for the moment—Google's Chrome. Rebranded as Microsoft Edge, it remains the little-used default Windows browser to this day.
Likewise, Facebook dominates among social media platforms. But again, the relevant market is much wider than just social media companies like Facebook. Social media competes for people's attention against television, music, movies, books, news, and (in non-pandemic times) in-person activities such as restaurants, concerts, sporting events, and more.
At the same time, social media can be a complementary good for many of its competitors. Sports and television shows can be more fun to watch while live-tweeting or chatting with friends and strangers through a Facebook group—especially during lockdown. In an era when many people value experiences over material purchases, people will sometimes choose activities with the intention of sharing them on social media. It is extremely difficult to show consumer harm in these cases, especially when social media is put into its proper wider context.
In fact, the biggest threat to Facebook's long-term dominance is likely its aging user base. Many youngsters would rather go to online spaces where their parents and teachers are not—platforms such as TikTok, which President Trump, in an act of ironic political grandstanding, threatened to hobble through punitive regulation, to Facebook's benefit.
Amazon's 2019 share of online commerce was 37.5 percent. But its share of total retail commerce—a more appropriate relevant market—was about 6 percent. COVID-19 lockdowns increased online shopping, and Amazon sales increased to the point of it hiring 175,000 new employees to keep up with demand. Yet it wasn't the only company to respond to and take advantage of the new conditions. Other retailers such as Walmart and Target now offer online shopping options that they may never have developed if Amazon (and the pandemic) had not forced their competitive hands.
Amazon has also made the grocery industry more competitive. Even before COVID upended grocery shopping, traditional grocers were adapting to the popularity of online grocery delivery through services such as Peapod, Instacart, and others. Had Amazon not jumpstarted this process when it acquired Whole Foods and launched its AmazonFresh service, COVID lockdowns would surely have been even more difficult for everyone.
Big corporations solve complex matching problems: In his book Tomorrow 3.0 (Cambridge University Press), Duke University economist Michael Munger points out that sharing economy companies—and antitrust targets—such as Uber, DoorDash, and Airbnb work by reducing transaction costs. Their business model is to solve complicated three-way problems cheaply and quickly.
Suppose a family wants to order a meal for delivery. First, they need to find a restaurant and place their order. Second, the restaurant needs to prepare the order. Third, the delivery driver needs to know when and where to pick up the order and where to deliver it. And payment needs to be quick and reliable.
Critics say gig economy apps are charging restaurants too much and paying drivers too little for the added conveniences they offer. To that end, New York, San Francisco, and other cities have already limited app fees to 15 percent of the order price, compared to a nationwide average of about 30 percent. California's A.B. 5 "gig worker" legislation was set to require Uber, Grubhub, and other delivery companies to convert most of their drivers from independent contractors to employees with full benefits until voters approved a ballot measure exempting those companies in November.
As the market matures and companies begin to merge, antitrust authorities might decide to get involved. They shouldn't.
Every restaurant has a choice between hiring its own delivery people or outsourcing to a delivery app. Businesses will choose whichever option has greater upsides for them. Moreover, entering and exiting an app service is easy for both restaurants and drivers. If the app company proves more expensive than in-house employees, no one will use the app. This built-in price competition can never go away and makes it very difficult to argue that any sharing economy–style service has a monopoly.
The Evolution of Antitrust
Evolution has wired us to think in binary distinctions. This was useful in our hunter-gatherer days. Protecting the tribal in-group was good for survival. So was wariness of out-groups. But modern life does not work that way. Commerce is based on peaceful exchange among strangers, exemplified by what Ball State University economist Steve Horwitz calls the "double thank-you."
The next time you buy a coffee, notice that the barista and the customer both thank each other, even if they're perfect strangers and may never see each other again. That's because each has made the other a little better off. That's how market economies work: People succeed through cooperation, not conflict. Even the most cutthroat business competition involves people competing for who can cooperate more efficiently. Absent rent-seeking—economists' term for seeking special government treatment—whoever can create more value for others is who wins.
Over the last 20 years, that's what has happened with America's biggest online businesses. Amazon, Google, and the rest of the big tech cohort have succeeded largely by creating value for consumers—often by giving away their most successful products or keeping prices low by building capacity and innovating in both services and technology. They have become important to the lives of millions of Americans because they connect people and provide access to goods and information in ways that are only possible at scale. And they have been targeted by self-interested lawmakers and competitors as a result.
Unlike the market, politics still operates by caveman rules. The secret to success in politics is conflict. That's exactly what's on display in the House Democrats' antitrust report released in October. Although it occasionally attempts to speak in the language of consumer harm, the report buys into the neo-Brand-eisian idea that market power is to be punished and controlled by the political class. The report recommends a variety of measures to leash big tech, including "non-discrimination" rules that would effectively force today's tech companies to become public utilities and acquisition restrictions that would presume any large corporate merger "anticompetitive unless the merging parties could show that the transaction was necessary for serving the public interest."
But what is the "public interest," if it's not lower prices and greater choice for consumers—and how would it be determined? As is so often the case with antitrust, it's a nebulous term that essentially gives Congress and judges free rein to decide. That's a recipe for transforming America's tech economy into a moribund quasi-government industry.
Although the report was written entirely by Democrats, its release served as a reminder that many in the GOP want to burden the tech sector with heavy-handed regulation for different reasons. Several Republicans were reportedly "frustrated that the report didn't address claims of anti-conservative bias from the tech platforms," according to The New York Times. This is the future of antitrust: a debate not about whether it should serve consumers but about whether it should serve political interests, and which ones.
The best option is to get rid of antitrust regulation altogether. Between the relevant market fallacy, inherent cronyism, politicized enforcement, vague legislation, and the shoehorning of unrelated grievances into cases, antitrust is doomed to fail. Even a government of angels could not save it.
But since antitrust laws aren't going anywhere anytime soon, the best we can hope for is that the consumer welfare standard weathers the current populist storm and that the public becomes more skeptical of how antitrust law works in practice.