The internet’s growth has been accompanied by the creation of a large number of new companies, including Apple, Amazon, Google, Facebook, Uber, and many others. These global enterprises sometimes seem to have a dominant, perhaps unassailable, competitive position in their markets. This supposed dominance has caused some to argue for tougher antitrust enforcement.
But a careful review of the special nature of these companies shows that current antitrust principles remain capable of dealing with most threats to competition. In those cases where antitrust is likely to be ineffective, other policies are capable of dealing with any problems. Moreover, most problems that critics point to are often exaggerated, undercutting the call for stricter antitrust enforcement.
The Role of Platforms
Most of the largest internet companies became successful by operating market platforms, which create value by bringing two or more sides of a market together, making it easy for them to interact. Like many other businesses, platforms benefit from efficiencies of scale; in many cases, the cost of serving another customer is almost zero. They also benefit from networks effects; each user benefits more if many others use the same platform.
These characteristics have several implications. One is that platforms often subsidize one side of the market in order to attract users. Although other sides may have to pay more as a result, they still benefit from having more potential partners using the platform. Another is that larger platforms are more valuable. One consequence is that competition officials need to look at how a corporate policy affects all sides of the market before deciding whether a particular policy is anticompetitive.
The Consumer Welfare Standard
For the past 40 years, antitrust policy has been guided by the consumer welfare standard. The courts and regulators evaluate corporate practices, including mergers, by whether they would result in enough market power to harm one or more sides of the market, including consumers, suppliers, and workers. This harm can take a number of forms, including price increases (although platforms are free to many users), quality reductions, and reduced innovation. This analysis requires a detailed examination of the particular market in question. Absent any harm, antitrust normally does not intervene. The consumer welfare standard is flexible enough to encompass a broad range of views and enjoys the support of almost all practitioners.
Lately, some critics have argued that the internet giants have become so big that their dominance is self-perpetuating. Companies with better technology or products are unable to mount an effective challenge because the giants either run them out of business or buy them up. These critics argue regulators should either break up large companies or regulate them as public utilities, even if doing so would raise consumer prices and slow innovation. In many cases, the critics underestimate the ability of the consumer welfare standard to achieve their objectives, provided that the requisite harm exists. In other cases, such as privacy and rising income inequality, antitrust is poorly equipped to handle the problem.
It is also important to remember that even the largest platforms compete fiercely to deliver value to all sides of the market. Although Facebook is dominant in social networking and Google dominates search, they compete intensely against each other and others in the most relevant market: advertising, where they vie for the dollars of powerful companies that also place ads in numerous other media. Even on the individual side, they inevitably compete for user attention during the finite number of hours in a day.
Technology has also changed the nature of competition. In numerous cases a company has seemed to have a dominant edge just before it slides into oblivion. Often the fatal threat comes not from a better version of the existing product but rather from companies offering new technology that delivers superior value. Perhaps as a result, the current giants remain some of the most innovative in the world. Rather than maximizing their near-term profits, they invest tremendous sums into research and development, often in new areas where they face fierce competition from incumbents, such as autonomous vehicles and artificial intelligence.
Although internet companies collect large amounts of individual data, this alone should not raise antitrust concerns. In a recent study economists Anja Lambrecht and Catherine Tucker found little evidence that the mere possession of even large amounts of data can protect a company from a superior product offering because data are seldom inimitable, rare, valuable, or non-substitutable. One reason is that having the right algorithms and business models tends to be much more important than having the right data. Another is that much data has a short “half life.”
Finally, many internet critics point to the privacy risks of allowing companies to gather large amounts of personal data. There have clearly been cases of consumer harm tied to either inappropriate use of data or inadequate security. The government itself has not been immune to these risks. But the privacy and security risks are no different if there are 10 major search engines and social networks than if there are just a few. In fact, more might be worse since large firms have much more at stake in getting privacy and security right than do midsized firms. Moreover, antitrust law is ill-equipped to deal with privacy issues. Fortunately, existing tort laws and regulations seem adequate to deal with the problems that have arisen. If Congress wishes, it can always enact additional protections.
The Benefits of Competition
Continued technological development is critical to higher productivity and better living standards. New technologies are most likely to arise in markets that are competitive enough to pressure each company to develop better products over time but that also allow companies to capture a significant share of the value that their innovations generate. An inevitable aspect of this competition is the decline of companies that fail to adopt new technologies over time. Another consequence is that higher productivity often displaces individual workers. Although competition produces losers, it ultimately delivers higher living standards for all. Antitrust law should not protect incumbents from legitimate competition, nor should it break up companies simply because they are big. Instead, it should ensure that the rules are fair and that companies must compete in order to succeed.
Joe Kennedy is a senior fellow at the Information Technology and Innovation Foundation.