A Scalpel, Not an Axe: Updating Antitrust and Data Laws to Spur Competition and Innovation Robert Litan September 2018 UPDATING ANTITRUST AND DATA LAWS TO SPUR COMPETITION AND INNOVATION SEPTEMBER 2018 Updating Antitrust and Robert Litan Data Laws to Spur Competition and Innovation INTRODUCTION Americans justifiably have These innovations and others have constantly long taken great pride in reshaped and remade our economy – displacing less efficient technologies and ways of doing the unmatched ability of business in a process of “creative destruction” the U.S. economy to enable that economist Joseph Schumpeter, many entrepreneurs to launch decades ago, singled out as the most important feature of capitalist economies. and grow highly innovative The most innovative and valuable companies of companies that drive our time are the leading “technology platform” growth and advance living companies: Amazon, Apple, Facebook and standards. Bold entrepreneurs Google – a group New York University Professor Scott Galloway simply labels “The Four.”2 Except and the companies they for Apple, none of these companies existed founded brought us modern before 1990. That they have eclipsed in the public mind – in such a relatively short amount communications, airplanes, of time – such other tech giants as Microsoft, automobiles, computer Oracle, Cisco and Intel is a testament to the software and hardware, and remarkable acumen of the founders and leaders of The Four, their highly skilled workforces, and electricity and other forms of to the economy and society that have enabled energy to power them all. them to flourish. P2 UPDATING ANTITRUST AND DATA LAWS TO SPUR COMPETITION AND INNOVATION But, in a reversal of fortune, the success of The In what follows I address and analyze separately Four is now being questioned and even attacked. and in sequence antitrust concerns raised by Coupled with rising concentration of national the apparent increase in industry concentration markets in other sectors, The Four are now being and the rise of the tech platform companies and blamed for a series of ills: limiting competition; what I believe are appropriate policy responses chilling startups and the innovation they bring, to them, and then the related but different thereby slowing down U.S. productivity growth; threats posed by not only the tech platforms but widening income and wealth inequality; and other firms inside and outside of tech holding or threatening our privacy and even our democracy. processing vast amounts of personal data. Calls are mounting for more aggressive antitrust Key Findings and Proposals for Modernizing enforcement across the board, statutory Antitrust Laws changes to the antitrust laws, breaking up The • National market concentration statistics Four for antitrust and non-antitrust reasons, are poor measures of the strength of and at the very least subjecting them to tighter competition. Trends toward increased regulation. Famed investor George Soros has corporate profitability, although flawed in predicted that two of these two companies, some respects, are better indicators of the Facebook and Google, will be doomed by future strength of competition – and are consistent regulation and taxation – a prediction that, if it with a moderate lessening of competition (or came true, ironically would render any breakup at least a reasonable risk that this happened) of the two unnecessary.3 Even The Economist, – in markets for products sold to business generally known for its pro-market views, and services. Recent evidence of the presciently warned The Four and tech industry downward pressure on pricing of consumer more broadly about the current “tech lash” – goods exerted by online commerce, and which still could take any number of forms – by Amazon in particular, undercuts claims against them.4 that competition has somehow lessened in consumer product markets. My purpose in this essay is to try to put into perspective this angst about the rise of the tech • While the balance of the evidence establishes platform companies and growing industrial that the tech platforms have not harmed concentration at the national level, and to outline economy-wide innovation, there is evidence what I believe to be a measured policy response that the strength of competition throughout to these developments. I say “measured” the economy has lessened somewhat. because, while there is a temptation to turn There is also evidence that the rise of the to radical solutions to fix our problems – with tech platforms and concentrated employer growing income inequality and our newfound markets across multiple sectors at the local worries about a loss of privacy – major level are contributing to wage inequality. departures from existing policies, especially toward some of the most successful private sector firms and the major economic and social benefits they have generated, also risk unintended costly consequences with uncertain benefits. P3 UPDATING ANTITRUST AND DATA LAWS TO SPUR COMPETITION AND INNOVATION • With certain exceptions, current antitrust for labor, where excessive concentration laws can effectively address today’s of employers can suppress wages below competition concerns, whether off or on competitive levels (although this scrutiny the Internet. The moderate lessening of is unlikely to have a major impact on the competition outside the consumer products technological forces driving wage inequality). sector also warrants close continuing The widespread use of “no poaching” scrutiny of a wide range of markets – even agreements imposed by franchisors against those not concentrated – for evidence franchisees is also disturbing, because they of price fixing. Antitrust enforcers must limit workers’ mobility and suppress their also pay close attention to the activities wages. While multiple fast food franchisors of dominant firms in all sectors, including have recently agreed to end the practice, the tech platforms, to ensure they are not a proposed bill by Senators Booker and abusing their market power by discriminating Warren to outlaw it would provide greater against firms (such as content providers legal certainty going forward and should on the Internet or on video platforms) with be adopted. which the platform providers may compete. • Enforcement of the current antitrust laws • It is too early to tell whether the Supreme also should take account of market impacts Court’s recent decision in Ohio v. American of data concentration, in both the merger Express, requiring antitrust prosecutors to and non-merger context. There is no consider “two-sided” markets like credit cards obvious additional legislative change that is as a single relevant antitrust market, will necessary to assure this outcome. affect future prosecutions of tech platforms • If the judicial ruling upholding AT&T’s for any abuses of any monopoly or market acquisition of Time Warner is not reversed power they may have. One reason is that on appeal, the Justice Department should the credit market in American Express had reconsider its opposition to conditions on three major competitors and the Court was vertical mergers involving firms with some not presented with a monopolization claim. market power to minimize the risk of anti- In addition, the majority opinion in American competitive conduct. Regardless of the Express made clear that its decision was outcome of that litigation, however, the fact-specific, which keeps the door open to Department should also update its vertical future antitrust challenges to tech platforms merger guidelines to better reflect current that abuse their dominance on just one side economic research about the dangers of of their markets. vertical mergers where one of the parties • Merger enforcement officials can and should has substantial market power. routinely consider the impact of mergers on lessening competition in local markets P4 UPDATING ANTITRUST AND DATA LAWS TO SPUR COMPETITION AND INNOVATION • Nothing the tech platform companies district court decision under the Sherman Act have done so far warrants their breakup to the Supreme Court, if either party wants to for antitrust or other reasons. The law pursue such an appeal. justifiably requires severe and/or sustained • Several of the more “populist” antitrust anticompetitive conduct as a precondition reform proposals – going backward in time for court-ordered breakups, which, over to interpret the antitrust laws as protecting the past century, have been infrequent. In competitors rather than the competitive the near term – now that the EU has ruled process, reworking merger law to achieve (subject to appeal) that Alphabet used other objectives for which it is ill suited, Android to unlawfully tie other Google changing the law on predatory pricing, or functions to it – an official and/or private regulating the tech giants as public utilities – antitrust suit against the company for the are either unnecessary or potentially same practices may be forthcoming in the counter-productive. United States. If such a case were filed and a court agrees with the charges, any tying can While measured antitrust reforms are called be much more cost-effectively addressed for, it is important that policymakers recognize through a judicial injunction than breakup. the limits of what sound antitrust policy and There is no principled basis for expanding enforcement can and cannot do. It can and must the government’s ability to break up any help ensure that markets remain competitive, of the tech platform companies