Good News: Antitrust Policy Saved From Years Of Neglect

Antitrust policy has been roused from its long sleep by the President. Two cheers from those who believe that markets can be relied upon to allocate the nation’s resources more efficiently than can the government, but only if those markets are competitive. The third cheer is being held until we are certain that overzealous enforcement does not result in Big Government replacing Big Tech as the allocator in chief, and we see how the new Biden appointees survive court tests of their theories and predispositions.

A vigorous anti-monopoly policy nor only enables decisions of consumers to allocate resources to their most efficient use; it minimizes the need for active government intervention in markets through direct regulation of prices, quality of service, and terms of entry; preserves political support for a free market, capitalist system of economic organization by increasing opportunities for entrepreneurs, and diffuses economic power. No surprise then, that none other than F.A. Hayek advised, in his The Road To Serfdom, “It is essential that entry into the different trades should be open to all on equal terms, and that the law should not tolerate any attempts by individuals or groups to restrict this entry by open or concealed force. … The functioning of competition … depends above all on the existence of an appropriate legal system, a system designed to preserve competition and to make it operate as beneficially as possible.”

Such a policy is especially important in our new, digitalized, high-tech economy. Not only because Silicon Valley demonstrated a tendency towards mutual back-scratching when leading firms agreed not to compete for staff, and paid healthy fines in a settlement that avoided a certain guilty verdict if they had gone to trial. But because the very characteristics of our new economy make competition needed now more than ever. For several reasons.

Rising inequality has become a source of social friction and a threat to continued mass approval of a free-market capitalist system. At the risk of upsetting those who believe that competition policy should be about efficiency and only efficiency, and should not pursue the social objective of contributing to upward mobility and an open society, I should point out that man does live by bread alone, that our competitive economy is more than a machine to grind out better and better products at better and better prices, laudable as that objective is. During the debate on the Sherman Act, its sponsor referred to the situation in which “a humble man starts a business in opposition to them [the trusts], solitary and alone” and is forced out of business by a monopolist’s predatory acts:

Why, sir, I know of one case where a man In good circumstances, a thrifty, strong healthy American was … met in just the way I have mentioned. If he had the right to sue this company in the courts of the United States under this section he would have been able to indemnify himself for the losses he suffered.

Congress was well aware of the imbalance of power between powerful incumbents and their challengers, existing and new. “This section opens the door of justice to every man, whenever he may be injured by those who violate the antitrust laws,” noted Congressman Webb of New York in a 1914 debate on the antitrust laws.

So we cannot ignore the fact that underlying the policy of preserving competition lies a deep sense that equity demands just such a policy, that the preservation of open markets creates upward social and economic mobility and diffuses economic and hence political power, keys not only to the maintenance of competition, and to continued increases in productivity and material well-being, but to the maintenance of an economic system that is fair, and is seen to be fair.

Raising Capital
Second, we need a vigorous competition policy because capital markets must be kept open to new entrants if a rapid rate of innovation is to be maintained. Venture capitalists, the first port of call for newcomers after they have exhausted their own and their families’ resources, are notably hard-headed realists. They know what some academic analysts do not: dominant firms are willing to have recourse to tactics that rely on their market power, rather than their efficiency, even if that does not maximize near-term profits. The use of these tactics turns the battle into one in which the firm with greater market power and deeper pockets wins, rather than the firm with the best mousetrap. Investors providing capital to new entrants or to growth-oriented small incumbents must be satisfied that an entrenched incumbent with substantial market power will not be allowed to snuff out incipient competition:

by deploying pricing policies that make it uneconomic for customers to divert business to new entrants, that create covert tying of new products to those in which the firm has a dominant market share, and that offer supply assurance only to customers who demonstrate their “loyalty” by taking their full requirements from the dominant firm. Pricing strategies that effectively prevent a competitor from wooing away its customers were at issue in a private antitrust case brought by AMD against Intel, resulting in a settlement of $1.25 billion.

by leveraging that power to gain advantages over competitors in other product and geographic markets. The possibility that Google is using its market position in search to do just that, or that Amazon has the power to deny competitors access to their distribution system on non-discriminatory term and to damage them by copying their products and using their customer information will soon be tested by the FTC or DOJ if the new leaders of those agencies run true to form.

by erecting barriers to entry by inducing distributors to boycott a potential entrant, or threatening to retaliate against its suppliers if the do business with a firm with which they compete.

Absent some reason to believe that the government will not tolerate such practices, or others with similarly unwholesome intentions, venture capitalists will, at the very least, raise the cost of capital to reflect the enhanced risk, and more likely suggest to the newcomer that completion of his or her doctoral dissertation or a job with the entrenched incumbent is the best option.

Preserving Discomfort
Third, we must recognize a reality. It is not surprising that dominant firms will sacrifice not only near-term but long-term profits – long enough to bleed a potential competitor of his cash reserves. As economist J.R. Hicks noted in 1939, the greatest of all monopoly advantages is a quiet life. Antitrust critics who contend that even dominant firms have incentives to innovate so as to maximize profits misunderstand the value of a quiet life. Innovation is hard work, often resulting in failure that requires embarrassing explanation to colleagues, board members, shareholders and others. Absent a threat to survival, why bother? Instead, deploy the weapons often available to firms with substantial market power to make certain that challengers have difficulty raising capital, or obtaining distribution outlets, or successfully applying for patent protection.

What To Do
The President has already taken the first step to convert his policy agenda into an action program. We may be a nation of laws, but the men and women enforcing them, or not, do matter. Biden has recognized that by appointing Lina Khan to chair the FTC, and nominating Jonathan Kanter to head the Antitrust Division of the Department of Justice. Khan has trumpeted her desire to break up big tech, and is already revamping the agency’s procedures to enhance her ability to realize the ambitions laid out in her law review articles. Kanter is the founder of a law firm that styles itself an “antitrust advocacy group”, and has represented some of the most prominent critics of Big Tech – News Corp, Spotify, Yelp – in their battles against Google and Facebook.

These and other appointees agree with the administration position that Big Tech must be brought to heel. Republicans have other reasons, related to the power some Big Tech firms have to censor views and people who do not agree with their political and, indeed, medical opinions; economic power does seep into other spheres.

The new enforcers will also be contributing to the administration’s drive to keep the economy growing rapidly despite some of its regulatory and tax policies. If innovation is now more than ever an important driver of productivity and, therefore, of advances in our standard of living, it is more important than ever that dominant firms not be allowed to control the pace at which innovations are developed by creating barriers to entry or artificially limiting the growth of firms that do succeed in wedging themselves into the market.

Surely, nothing in the nature of high-tech industries makes such restrictions on the tactics available to dominant firms any less desirable than they have been for decades, when Standard Oil was regarded as, among other things, a Big Tech firm. Indeed, it is arguable that such constraints on the use of market power are more compelling in the case of industries in which waves of creatively destructive innovation are to be relied on as the principal engines of progress.

Making relief effective will require abandoning any substantial reliance on regulatory or ongoing judicial supervision of the practices of a company specializing in the creation of intellectual property, for two reasons. First, we do not want to slow the pace of innovation to accommodate the more leisurely one of the judicial process if courts become involved in reviewing competitive tactics. Second, it is not at all certain that the courts can cope with firms in control of algorithms that even our youngest jurists would have difficulty monitoring.

This difficulty of devising effective behavioral solutions suggests that structural solutions such as divestiture must play a large role in leveling the competitive playing field. This accords with the stated preference of the new chair of the FTC, who has called for the break-up of Amazon and Facebook, and led those firms to request that she recuse herself in matters involving them.

A new era of antitrust enforcement is upon us and if the statutes are applied with wisdom and fairness, preventing enforcement from being converted to harassment, can contribute to better economic performance – a more rapid rate of innovation that accelerates the rate of productivity advance, more consumer choice, greater opportunities for innovators to raise capital and create new products and services for consumers – and a capitalist system that is perceived as fair. All depends of course, on rather chair Khan’s academic studies and the positions taken by Mr. Kanter on behalf of his clients prove to have merit when the facts in these cases are laid out in courts. At this point, that is something any commentator must classify as a known unknown.