Big-Tech and the Resurgence of Antitrust
In recent years, a number of analysts have increasingly railed against large firms, particularly modern technological giants such as Amazon, Google, and Facebook — calling for such firms to be regulated like public utilities or perhaps broken up as was famously done with Standard Oil over a century ago and, more recently, with AT&T. (See for instance writings by Lina Khan, Barry Lynn, Scott Galloway, and Jonathan Taplin). Very specifically, these commentators call for a change in antitrust policy from one that focuses primarily on consumer welfare in terms of prices paid and availability of products, to one that views all large firms with sizable market shares as problematic. This invokes an American populist tradition that is suspicious of concentrated economic and political power. It also reflects a response to the more lenient antitrust policy, that began in the 1980s, in which mergers are more likely to be approved and large firms are less likely to be charged with anticompetitive practices. But at the same time, there are many forces at work in the modern, digitalized economy that foster the rise of big firms and a small number of players in the market. So, the debate over the proper goal of antitrust policy has been re-energized.
Rising corporate concentration and increasing income inequality are bolstering calls for more stringent application of antitrust laws.
- A populist antipathy to concentrated business power is a long-standing American political sentiment. In this perspective, concentrated business power is bad per se even if it results in lower consumer prices. Large corporations can bully their workers and suppliers. Their CEOs can earn excessive income. They can also lobby for legal privileges that protect them against potential challenges from small entrepreneurs and firms. Seen in this light, mega-corporations can also corrupt the political process pursuing laws that enshrine their position. John Sherman, after whom the principal U.S. antitrust law is named, saw the trusts and giant corporations of his times as enjoying a “kingly prerogative, inconsistent with our form of government.” Justice Louis Brandeis famously argued against “bigness” in business, most notably in his 1914 essay The Curse of Bigness. New Deal legislation such as the National Recovery Act and the Robinson-Patman Act explicitly tried to restrict price reductions by large corporations. Up until the late 1970s, courts and antitrust officials took a very aggressive stance toward perceived violations of the antitrust laws. For instance, the Justice Department successfully challenged even relatively small mergers such as Brown Shoe and Kinney that resulted in a combined market share of only seven percent. In the Utah Pie Case, the Supreme Court found three large companies guilty of violating antitrust law because they lowered their prices in the Salt Lake City market when a small local firm (Utah Pie) entered.
- Major changes in antitrust enforcement policy, towards more leniency for mergers and other business practices that would have been previously opposed, began in the 1980s. Advances in economic theory and empirical analyses led most economists to question the policy behind Brown Shoe, Utah Pie, and other cases. This line of reasoning, known as the Chicago School, along with Robert Bork’s influential 1978 book The Antitrust Paradox, contributed to new merger guidelines from the Justice Department in 1982 that found considerable justification for mergers and other business practices that would have been opposed in earlier times (see this EconoFact memo). Merger policy became more lenient with respect to both horizontal (direct competitors) and vertical (producers and suppliers or dealers). Aggressive price cuts became viewed as a manifestation of good, intense competition rather than as a predatory practice designed to eliminate competitors. The major thrust of much of the policy changes initiated in the 1980s reflected a new recognition that if the policy aim was to sustain competition for the benefit of consumers, pre-1980 policy had been too restrictive and provided more protection for competitors than for competitive markets.
- More recently, economy-wide changes, especially rising income inequality, have contributed to strengthening populist anti-trust sentiments. Industrial concentration began to rise in the 1980s and has continued to do so, modestly but persistently, over the next thirty years or so, extending to virtually all sectors of the economy (see here and here). Perhaps not surprisingly, the rise in industrial concentration has been accompanied by a bumpier but equally durable and widespread rise in corporate profits from around four percent of national income in 1980 to an average of over seven percent between 2010 and 2017, while labor’s share of national income has correspondingly fallen. The sharp rise in income inequality since 1980 has seen the share of aggregate income going to the top twenty percent of households rise from about 44 percent to nearly 52 percent, and an even larger percentage gain for the top five percent of households, from 16.5 percent to over 22 percent. In those same years, the share going to the bottom forty percent of households decreased from 14.6 percent to 11.3 percent, while the share of the middle forty percent has declined from 41.5 percent to 37.3 percent (Census Bureau). Gains have been especially concentrated on the super-wealthy, as the top one-percent saw their after-tax income rise by nearly 200 percent between 1979 and 2014. Many see a direct connection between the less aggressive antitrust policy that emerged in the 1980s and these broad economic trends that started at roughly the same time. Antitrust authorities have also increasingly come to recognize that dominant firms and mergers can have an important effect on innovation (see this EconoFact memo). But drawing a connection between the less aggressive antitrust policy and broader economic effects in the economy is difficult. Globalization, technological change, decreasing employment in manufacturing and declining union membership are likely important sources of increasing income inequality.
- Bolstering the argument for stricter antitrust enforcement, there is some evidence that mergers contribute to rising prices in more concentrated industries. For example, John Kwoka reviews the post-merger outcomes of about 50 mergers that were permitted and finds that on average the post-merger price in these cases was 5.8 percent higher than it would have been without the merger. Somewhat similarly, Blonigen and Pierce use plant level data to review thousands of merger transactions across US manufacturing. They find that the markup of price over costs typically rises after a merger by anywhere from 5.8 to 7 percent, but that costs rarely fall. Ashenfelter and Hosken review detailed case studies of five major mergers and find that prices rose in four of these with the average increase on the order of 3 to 7 percent. Similarly, Dafny et al focus on the 139 markets served by both Aetna and Prudential and find that insurance premiums rose by an average of 7 percent in these markets after these two firms merged.
- But beyond a more lenient antitrust policy, other factors, such as the role of network effects and of two-sided platforms can also help to explain increased concentration and profits, especially with regards to the tech giants like Amazon, Apple, Facebook and Google. The value to an individual consumer of certain goods and services increases as more people purchase it. For example, as more consumers buy Apple products, more designers write applications to run on Apple software, and as more applications are created for Apple products more consumers want to buy them. These network effects create positive feedback loops that encourage firms to grow large. Industries with strong network effects naturally converge to a small number of big firms where only the firms with very large networks or market shares can survive. Network effects are particularly prevalent in markets served by firms that act as two-sided platforms where advertisers on one side can find potential customers on the other side. For example, the more that consumers use Google, the more firms want to advertise on its search engine, and, in turn, the more consumers want to use Google. Two-sided platforms are very prevalent in the digital economy and include media companies, credit card companies, gaming consoles, and dating services. This is reinforced by scope economies - it is cost efficient for a retailer such as Amazon to sell many products, not just books. The cost efficiencies from network effects, two-sided platforms and scope economies tend to make companies natural oligopolies with sizeable market shares and profits.
- Because a network must be large to compete effectively against rivals, price competition to survive in these markets tends to be fierce. In network industries, firms will fight hard to get a large market share because failure to do so can mean corporate death. However, the pricing strategy for two-sided firms is complicated. The price charged to one side of a platform, e.g. advertisers, depends on the price charged on the other side, which affects the number of users. Therefore, price competition can generate extremely low prices on one of the sides of the platform: newspapers charge a modest price to their readers and earn most of their profit from the price charged to advertisers; Google earns revenue from advertisers but on the other side consumers search for free.
What this Means:
What is the appropriate goal for antitrust policy? Is it increasing benefits to consumers through lower prices, so a merger that is foreseen to lead to notably higher consumer prices should be opposed, but one that does not lead to higher prices should be permitted? Is aggressive price-cutting by large firms beneficial? Or rather, in line with the emerging populist antitrust view, should mergers that create large firms be opposed because that makes it harder for smaller competitors to survive? And is the rise of large powerful firms the source of disturbing trends such as rising income inequality and growing corporate political influence? If so, should antitrust policy be used to prevent or dissolve such concentrations of corporate power? Our view is that the goal of antitrust should remain, as it has been, insuring that consumers enjoy the benefits of healthy market competition. There is evidence to suggest that merger policy has been too lenient in the past and future policy should be more restrictive. But antitrust policy is a poor tool to address broader social problems, such as the political power of large firms, the troubling issues associated with the extensive information on private consumers that the big tech firms possess, and income inequality. Other tools, such as campaign finance reform, privacy laws, and progressive taxation, are better positioned to address these issues directly. The misuse of antitrust policy risks dulling competitive forces. Firms may not compete aggressively in prices and could be wary of exploiting network effects and scale economies if they know that growing large will lead to government efforts either to break them up or to regulate them. The appropriate goal of antitrust policy should remain precisely what economic theory and evidence confirm it can accomplish — the maintenance of competitive forces to the benefit of consumers. Jettisoning this goal in an effort to address broader social aims is likely to achieve neither objective.