Tech

U.S. Antitrust Law Is Not Broken

Democrats want to fix it for the wrong reasons.

When trust breaks.

Photographer: Thomas Trutschel /Photothek via Getty Images

We’ve seen this movie before.

Upstarts seize new technological opportunity, overturning the old business order in the process. They’re celebrated as entrepreneurial heroes as they grow rich and self-important. Then public opinion sours on their success. Competitors complain they’re too powerful. The government brings antitrust action and threatens to break them up. Years of bureaucratic struggle ensue (cue the montage of lawyers with piles of paper, economists writing on whiteboards, and multiple presidential inaugurations). In the final act, a settlement is reached, but it’s largely irrelevant: While the lawyers were fighting, a new generation of upstarts overturned the business order once again.

QuickTake Tech's New Monopolies

It happened with IBM and it happened with Microsoft. Both spent more than a decade fighting the government, and both were left behind by competitors by the time their cases were resolved.

“A federal judge has made it official: Microsoft is a monopoly, a two-ton bully that squashes competitors and cheats consumers,” I wrote in 1999. “Still, no matter how much the government lawyers crow or Bill Gates complains, the fact is that the real future of the software industry is already being decided entirely outside the court system -- in a technological marketplace too fast-moving and too accepting of good new ideas to be artificially held in check.” And smartphones weren’t even in the picture.

Now both liberals and contrarian conservatives are jonesing for a remake of that familiar tale, this time with at least three villains: Google, Amazon and Facebook. When Bloomberg Businessweek ran a cover story titled “Should America’s Tech Giants Be Broken Up?” Keith Ellison, the congressman and deputy chair of the Democratic National Committee, tweeted his answer in all-caps righteousness: “YES!” Since then, the antitrust chorus has grown louder.

But there’s a problem.

Current U.S. antitrust doctrine uses the effects on consumer welfare to evaluate whether a merger or business practice is anti-competitive. That makes a lot of sense. Competition is supposed to benefit consumers, by giving us more for our money. Monopoly power, by contrast, increases profits by keeping prices artificially high. But Amazon drives down prices and Google and Facebook give services away for free. (They’ve also depressed ad rates.)

So the focus on consumers is too narrow for ambitious progressives. “We’re trying to agitate a move away from a consumer welfare approach … towards an approach that looks at a variety of factors that I would argue represents a more reality-based understanding of how competition works,” Lina M. Khan, the author of an influential Yale Law Review article on the subject, told the New Republic’s Brian Beutler.

As listed in the congressional Democrats’ new economics platform, those factors might include just about anything people don’t like: “whether mergers reduce wages, cut jobs, lower product quality, limit access to services, stifle innovation, or hinder the ability of small businesses and entrepreneurs to compete.” It continues: “In an increasingly data-driven society, merger standards must explicitly consider the ways in which control of consumer data can be used to stifle competition or jeopardize consumer privacy.”

Democrats also pledge to shift the burden of proof, so that mergers would be presumed impermissible. Instead of the government raising potential problems, writes Beutler, companies would have to show that combining “will benefit the economy across these metrics before a merger can be approved. This would have the immediate effect of slowing consolidation, but it would also solve the administrability problem that might arise if questions about a merger’s impact on, say, labor markets were left to the government to evaluate.” The goal is to have new antitrust legislation ready to enact the moment Democrats regain control of Congress and the White House, whenever that may be.

Although it can sound seductively like common sense when laid out by Senator Elizabeth Warren, this radical revision of U.S. antitrust law is a prescription for trouble. It would turn antitrust enforcement into broad-brush economic planning, with a bias toward protecting the status quo.

For starters, it redefines competition as its opposite: the maintenance of unchallenged, often local monopolies. “When competition declines,” says Warren, “small businesses can be wiped out – and our whole economy can suffer.” Her proof: “Wal-Mart’s gigantic size gives it a competitive advantage over small businesses. And often, when Wal-Mart moves into town, small businesses collapse because they can’t compete with the price leverage Wal-Mart has built with its suppliers.” Mom and Pop need higher prices! And so does Procter & Gamble!

The shift in focus also defeats one of one of the principal justifications for busting up big companies, which is to limit their political influence. “There is a direct connection between economic power, bigness, and political power,” says University of Chicago economist Luigi Zingales. It’s a sentiment Warren echoes, decrying “the ability of giant corporations to use their money and power to bend government policy and regulation to benefit themselves.”

But herein lies the true genius of current U.S. law. By focusing entirely on consumer welfare, it limits the power of special interests in driving antitrust decisions. Consumer welfare is broad-based -- far more so than the interests of the rivals, suppliers or employees who might find their price-raising powers limited by competition from a more efficient, if larger, business. Consumer welfare even includes the benefits to future consumers, an interest group unrepresented in, say, land-use regulation.

If regulators get to consider a grab bag of other factors, by contrast, they can all too easily make judgments shaped by lobbying clout or political allegiances. Just look at Warren’s statement about Wal-Mart, with its emphasis on protecting stores with higher prices. Consumer welfare isn’t a perfect standard, but it’s at least a proxy for the public good.

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

    To contact the author of this story:
    Virginia Postrel at vpostrel@bloomberg.net

    To contact the editor responsible for this story:
    Mike Nizza at mnizza3@bloomberg.net

    Before it's here, it's on the Bloomberg Terminal.
    LEARN MORE
    Comments