Why the entire system needs a rewrite.
At first glance, Amazon doesn’t look like a monopoly. It’s overall sales for 2017 were less a third of Walmart’s whopping $374.80 billion, placing the tech company at third in a list of the United States’ largest retailers. However, when the frame of reference is narrowed to just e-commerce, Amazon’s dominance becomes clearer: 44 cents of every dollar is spent at Amazon. By contrast, the next biggest online retailer, Ebay, garners a mere 6 cents.
Many have claimed that Amazon has used its dominant market position to engage in anticompetitive behavior. For example, as the company is both a retailer and a seller platform, it is able to monitor the sales data of private vendors on their website. The company can then, in turn, use this data to understand what products sell best and then sell those products itself, thereby cutting out the middle man. This has left independent retailers in a catch-22: they need to sell their goods on Amazon because that’s where people shop; but doing so could put them out of business.
Now, in the EU an investigation has been launched to look into whether or not Amazon’s practices have constituted a violation of competition law, and in the past the EU has fined tech companies like Google billions of euros for similar anticompetitive behavior. However, in the U.S. there have been close to no sanctions placed on any of the “Big Five” tech companies (Google, Amazon, Facebook, Twitter and Apple). U.S. competition law (or as it’s called in the States, antitrust law) has been unable to deal with growing technology companies in its current form due to its institutional arrangement and its reliance on the consumer welfare doctrine.
The three main statutes that make up the bulk of U.S. antitrust are the Sherman Antitrust Act of 1890, the Clayton Antitrust Act of 1914 and Federal Trade Commission Act of 1914. The Sherman Act prohibits anticompetitive agreements and unilateral conduct that attempts to monopolize a market, and authorizes the Department of Justice and private parties to bring suits against parties violating it. The Clayton Antitrust Act expanded on the Sherman Act by outlawing exclusive dealing agreements; mergers and acquisitions, etc. that substantially reduce market competition. The Federal Trade Commission Act, passed in tandem, created a new commission (the FTC) that was empowered to seek monetary redress for consumers and conduct investigations into business entities, among other things. Each of the three acts feature a heavy reliance on the judicial system (meaning, the courts) in antitrust enforcement.When compared with other countries, notably the EU, the United States has an overly private- based antitrust enforcement mechanism. This is a major issue.
“When compared with other countries, notably the EU, the United States has an overly private- based antitrust enforcement mechanism. This is a major issue.”
In theory, the U.S.’s system is mixed between public and private enforcement. Private enforcement entails one party suing another for damages, while public enforcement is carried out by a governmental agency. However, the two public enforcers of antitrust law (the DoJ and FTC), as outlined by these statutes, are beholden to the strict text of the acts which created them, meaning they cannot enforce their own changing, internal prerogatives. Furthermore, the texts of these laws are vague in nature, which has meant that historically, public enforcement has been much less active than private enforcement.
When compared with other countries, notably the EU, the United States has an overly private- based antitrust enforcement mechanism. This is a major issue. The OECD asserts that, “Obtaining the right balance between [public and private antitrust enforcement] is key,” in creating an effective enforcement mechanism.
The court-based nature of American antitrust has held back enforcement in many ways. For instance, the issue of judicial activism and restraint arises from the reliance on the judiciary. Judicial activism is a term for the claim that the Supreme Court has authority to make law, while judicial restraint refers to the idea that Court authority extends only to resolving disputes in accordance with law made by Congress. The Supreme Court varies in the judges that sit on it, and thus in the overall ideology that guides it. Now, the interpretive doctrine of the court is key in whether or not some antitrust cases are even brought to trial. Moreover, since the U.S. is mainly a common law system, court cases are essential in establishing precedent and expanding the law. The oscillation of the court between activism and passives has led to less continuity within U.S. antitrust over time. For example, the Warren court, which served from 1953-1969, was majority activist and thus applied antitrust more broadly and often than the Rehnquist Court, an overwhelmingly passivist court that served from 1986-2005.
The overly-private enforcement mechanism also raises many issues. For instance, private antitrust litigation sometimes has difficulty reaching entire industries because of semiprocedural, semisubstantive doctrines like standing, antitrust injury, etc. Public enforcers don’t face these obstacles. Public enforcers would also be able to enforce a more consistent antitrust doctrine, while private enforcement cannot.
This has led to a second issue, which is the lack of consistency in U.S. antitrust enforcement. The uneven application of antitrust law has led some to claim that U.S. competition law is “populist” in nature, meaning that it is only applied and expanded in times during which doing so is politically desirable (such as times of massive inequality or economic turmoil). This may partially explain why tech companies have garnered such little scrutiny from the American government in the past few decades. In fact, throughout history, antitrust and the fluctuations of the American economy have been inextricably linked. Antitrust itself was born during a period of populism (the Gilded Age) when inequality was at all-time highs. By contrast, when the economy was doing well in the 1980s, antitrust policy was lax: the merger movement flourished. The lack of will to enforce antitrust during the eighties was also due to the creation of the consumer welfare doctrine years prior.
The Consumer Welfare Doctrine
Some scholars today have argued that there is no need to rewrite current antitrust law. In essence, the U.S. government would be able to better deal with the abuses of big tech if it merely enforced existing laws more strictly. The inherent flaw in this argument is that even if this was done, the cases brought to the courts would be likely be lost.
This is due to the U.S. judiciary’s reliance on the consumer welfare doctrine as an interpretive guideline to antitrust law. The doctrine was created by Yale professor Robert Bork, who belonged to the libertarian Chicago School of Economics. In his book The Antitrust Paradox he decreed that all antitrust suits should be judged by one question: What will most lower prices for consumers? The answer, to him, was more mergers. When companies merge, they become more efficient, and pass this efficiency on to consumers as lower prices. The Reagan administration thus incorporated this doctrine as official Department of Justice and Supreme Court policy, and it has remained so ever since.
The two anticompetitive practices that Amazon and other tech companies have been accused of, predatory pricing and vertical integration, are little considered by this doctrine. Predatory pricing refers to the practice of a dominant company lowering its prices and forgoing profits in order to put a competitor out of business or more easily buy them out. Bork argued that such a practice could not exist, because logically companies would always pursue short-term profits over long term growth. Vertical integration, in which companies pertaining to different markets (such as online platforms and retail), also did not constitute an issue to Bork: since markets were perfectly efficient, he assumed that a lower-cost competitor would always fight off a would-be monopolist.
However, perhaps the most compelling reason why tech companies have been able to flourish under the consumer welfare doctrine is that fact that they do indeed provide cheap, reliable service. Thus, these enterprises’ ability to garner market power while still keeping prices low has meant that, even if the U.S. government wanted to, it would not be able to enforce antitrust against them. And up until recently, it hasn’t seemed like the U.S. government has wanted to. People love Prime and would hate to pay for Facebook. Therefore, tech companies have swelled to the proportions they are at today.
Since its founding, Google has bought out over two-hundred startups, including companies like YouTube, Android, and DoubleClick. Amazon, too, has acquired its fair share of competitors, mainly through predatory pricing tactics, since Amazon has the money to out-discount any of its competitors. The company’s acquisition of Diapers.com in 2010 is emblematic of this. After the smaller retailer refused to be bought out, Amazon dropped its diaper prices by 30% until the it changed its mind.
As aforementioned, the growth of tech companies have, on the whole, lowered prices. But their growth has not been all good. These companies now wield a never-before-seen power over both their respective markets and our daily lives. They are now able to commission studies, rewrite
regulations, and drain education and welfare systems by securing billions in tax cuts, as seen with Amazon’s now-cancelled HQ2 deal with the state of New York. These companies can threaten other industries by simply entering them, such as when Amazon announced its acquisition of Whole Foods. In fact, Mark Zuckerberg can be quoted as saying, “In a lot of ways, Facebook is more like a government than a traditional company.”
The dominance of the Big Five has also led to a decrease in innovation across many different sectors. Today, venture capitalists are hesitant to fund new startups out of feat that they’ll quickly be bought or driven out of business. The number of tech startups has decreased in recent years and economists have reported fewer and fewer high-growth young firms. Also, first financing rounds for tech startups have declined over 22% since 2012.
Perhaps the greatest argument that the current state of US antitrust is unable to handle the rising tech sector is the fact that scholars and politicians have called for change. Within recent antitrust scholarship has arisen the New Brandeis School, based on the ideology of former Supreme Court Justice Louis Brandeis, who served from 1916 to 1939. The main tenets of the new philosophy are: democracy involves not merely political and religious liberty, but also industrial liberty; certain industries tend towards monopoly, and must not be broken up, but rather publicly regulated so as to prevent exploitation; and lastly, that competition law must focus on structures and processes of competition rather than outcomes. In this last point, the New Brandeis School is inherently anti-Consumer Welfare doctrine. Low prices are not the focus of this renewed vision of antitrust, but rather maintaining market structures that distribute individual opportunity and prosperity.
A sub-movement within the New Brandeis School is called “Hipster Antitrust.” Lina Khan, a young, prominent lawyer, has spearheaded this discourse. In her article Amazon’s Antitrust Paradox she argues that the current framework in antitrust is unequipped to capture the architecture of market power in the modern economy. Specifically, the consumer welfare doctrine under-appreciates how predatory pricing and vertical integration can be anticompetitive. First, investors have awarded growth over profits. Under these conditions, predatory pricing has flourished. Second, because online platforms serve as critical intermediaries, vertical integration has let these platforms control the essential infrastructure on which their rivals depend. This dual role has enabled them to exploit information to undermine their competitors. Thus, she asserts that gauging real competition in the twenty-first century marketplace requires analyzing the underlying structure and dynamics of markets rather than pegging competition to a narrow set of outcomes such as price.
Critics from scholars have seeped into the political world. Politicians on both the left and right have decried the abuses of tech companies in the contemporary economy, and antitrust law is gearing to be a major issue in the upcoming 2020 presidential election. On the left, presidential- hopeful Elizabeth Warren has recently suggested breaking up big tech companies and unwinding some of their previously allowed mergers. In a blogpost, she declared that big tech firms have “too much power over our economy, our society and our democracy. […] they have hurt small businesses and stifled innovation.” Amy Klobuchar, who is also running for president, has recently sponsored bills that would toughen America’s antitrust laws, for example by requiring merging firms to prove their deals would not harm competition.
Republicans have been more muted on the issue than Democrats, but there has been growing concern from the far right. Steve Bannon, former advisor to President Trump, has repeatedly assailed tech companies for their liberal worldview and what he calls their threats to free speech. Ted Cruz, who ran for president in 2016, shares this fear, calling big tech, “a serious threat to our democracy.”
In sum, the US’s antitrust law is less equipped to deal with growing tech companies due to its reliance on public over private enforcement, the courts and its embracing of the consumer welfare doctrine. The answer is not just stricter enforcement of existing laws, but rather a rewriting of the entire system. As a consequence, numerous scholars and politicians on both the right and the left have reignited a conversation on the different ways in which US antitrust could be reworked to adapt to the growing tech sector. And an answer is sure to come soon: while the 2020 election is certain to be many things, don’t forget: billions of dollars of the American economy are also at play.
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