The Real Issue in Tech Antitrust: Where’s the Harm?

By Max Gulker

The tech world has been rocked in the past several days by news of antitrust investigations looming over the horizon for perhaps the four most prominent companies--Google, Facebook, Apple, and Amazon. Probes and regulatory action could come from multiple government agencies and even Congress, with the potential to vastly change the way technology is developed and sold in the United States.

News that the executive branch was beginning a period of heightened scrutiny came late last week. With more than a little irony, agencies historically tasked with combating collusion among corporations did a bit of colluding themselves. In negotiations the New York Times described as “unusual,” the two agencies divided the targets of high-publicity tech-industry investigations between themselves. The DOJ will handle Google and Apple, while the FTC will take on Facebook and Amazon.

Not to be left out of the high-profile action, lawmakers in the House announced they would begin a probe of their own into potential antitrust violations by the tech giants.

No matter one’s opinions on antitrust and big business, arguing that these companies’ primary impact on our economy and lives has been anything but positive and even revolutionary is difficult. In fact to justify restrictions with teeth on the tech giants, policymakers would have to revolutionize U.S. antitrust itself, albeit in a far less positive way.

Where’s the Harm?

The last sea change in U.S. antitrust came in the late 1970s, when scholar Robert Bork authored “The Antitrust Paradox.” Bork argued successfully that the predominant standard in antitrust enforcement should be direct impact on consumer welfare--that is, unless a company’s market power hurts consumers’ wallets through higher prices, or choices through lower innovation and quality, the government should get out of the way.

Several major media outlets have already pointed out how difficult it would be to meet this standard in the case of any of the four tech giants. The New York Times views the consumer welfare standard as working in the companies’ favor, writing that, “It is difficult to argue that consumers are being robbed — the argument made by the Senate for passing the original antitrust laws more than a century ago — when companies like Google and Facebook do not charge users. Amazon prides itself on charging low prices.”

Two Dimensions

Economists generally categorize market power into two types, horizontal and vertical. With a basic understanding of how these two types of market power work, one must be highly skeptical that either type of power from these companies materially harmed consumer welfare.

Horizontal market power refers to the market share a company has for a single product or service. With the possible exception of Apple, all of the tech companies in question are dominant enough to at least raise eyebrows:

  • Google controls just under 90 percent of the market for internet search

  • Facebook controls about 66% of the social media market

  • Amazon accounts for almost half of the online retail market (though just 5 percent of retail overall)

  • Apple’s smartphone market share has been falling, to about 15 percent at the end of 2018

However, in the world of technology, the link between horizontal dominance and consumer harm is far more complex than in older industries. In many ways, the tech companies’ product quality derives directly from their size. For example, Google can use its data from billions of previous searches to deliver results far better tailored to consumers’ needs than other search engines. And Facebook is built on network effects of colossal importance--the more people you know that use Facebook, the more valuable it is to you. “More competition,” in the standard econ textbook manner, would degrade the quality of both services.

Vertical market power can be both more subtle and controversial. This refers to a single firm controlling large portions of the market up and down a supply chain. Google dominates search and ad revenue. Apple and Facebook both put their own apps in direct competition with those made for them by third parties. And Amazon controls massive global distribution channels for the products it sells in a manner unprecedented before the internet.

Using Apple as an example, the tech giant can make it harder for apps competing with its own services to do business. This is just what Spotify alleged to EU competition authorities in March, claiming Apple unfairly charged them fees and made marketing more difficult than necessary. The implication is that Apple did so to gain more market share for its own music streaming service.

Consumer harm from vertical market power is notoriously difficult to prove by American legal standards. Last year, a U.S. federal court opined on a vertical merger, between AT&T and Time Warner, for the first time in 41 years. Observers had been surprised that the Justice Department even contested the case, breaking with decades of practice allowing such mergers, with some even speculating that the move was part of a vendetta by President Trump against Time Warner for negative coverage he received on channels it owned like CNN.

Proving consumer harm from vertical market power generally means establishing that the vertically integrated company has more bargaining power and can thus charge rivals higher prices. Judging from recent history, courts and even regulators are generally skeptical of this theory. But in the fast-evolving world of mobile apps, for example, with several large smartphone markers, service providers, and small and large entrepreneurs creating apps every day, making an airtight case for such linkages may be next to impossible.

Hipster Backlash

With the government facing an uphill climb to establish consumer harm by the tech giants from either horizontal or vertical market power, what do regulators and politicians hope to achieve? Are these moves anything beyond grandstanding with an election year looming?

The answer may lie in recent conversations, especially on the left, that the U.S. needs much more interventionist and aggressive antitrust policy that leaves the consumer hard standard behind. The movement sometimes called “hipster antitrust” for its retro devotion to standards older than consumer harm would seek to use government antitrust power to achieve broader political and economic goals like reducing income inequality and unemployment.

The potential for hipster antitrust practitioners run amok in a future administration is of deep concern. Those supporting the status quo of the consumer harm standard may be stretching to lash out at the tech giants in a preemptive move to establish their theory still has teeth. Either way, hipster antitrust taken to its logical extreme involves the government using its power over firms to make them do whatever politicians feel like. That type of unlimited government power is a blast from the past that any observer who appreciates the importance of markets would like to forget.

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Max Gulker

Max Gulker is an economist and writer who joined AIER in 2015. His research focuses on two main areas: policy and technology. On the policy side, Gulker looks at how issues like poverty and access to education can be addressed with voluntary, decentralized approaches that don’t interfere with free markets. On technology, Gulker is interested in emerging fields like blockchain and cryptocurrencies, competitive issues raised by tech giants such as Facebook and Google, and the sharing economy. Gulker frequently appears at conferences, on podcasts, and on television. Gulker holds a PhD in economics from Stanford University and a BA in economics from the University of Michigan. Prior to AIER, Max spent time in the private sector, consulting with large technology and financial firms on antitrust and other litigation. Follow @maxgAIER.