This is a paper I wrote for my micro theory class at Villanova University addressing the issues of big tech giants and antitrust policy.
Economists have long advocated for the beneficial aspects of markets, citing healthy competition among firms and Adam Smith’s “invisible hand” to help guide the economy in the proper direction. Still, companies with significant monopoly power are often seen as too dominant, restricting competition and causing market inefficiency, and Greg Ip notes that “throughout history, entrepreneurs have often needed the government’s help to dislodge a monopolist—and may one day need it again” (Ip, WSJ 2018). Amazon, Google, Facebook, and Apple, Scott Galloway’s “The Four” are all among the top market capitalization, each with the potential to wreak havoc on the labor market. Ip properly builds a framework of exactly how dominant these tech giants are:
In the U.S., Alphabet Inc.’s Google drives 89% of internet search; 95% of young adults on the internet use a Facebook Inc. product; and Amazon.com Inc. now accounts for 75% of electronic book sales. Those firms that aren’t monopolists are duopolists: Google and Facebook absorbed 63% of online ad spending last year; Google and Apple Inc. provide 99% of mobile phone operating systems; while Apple and Microsoft Corp. supply 95% of desktop operating systems. (Ip, WSJ 2018)
A 2017 Goldman Sachs report noted that self-driving artificially intelligent technology—currently being developed by Google, Amazon, and Apple—could remove as many as 300,000 jobs a year in two decades or more. The pertinent question remains: how big is too big such that consumers are being harmed by the growing dominance of digital platforms? In this paper, we shall explore the primary purpose of antitrust legislation, the shortcomings of price monitoring as a measure of harm to consumers, the growing dominance of digital platforms and the role of network effects, the overall concerns of these tech giants, and why (or why not) the average consumer should be worried about the revival of the Luddite Fallacy (see note 1 at bottom of article).
PURPOSE OF ANTITRUST POLICY
The primary purpose of the United States Antitrust laws—a collection of laws at both the federal and state level—is to promote fair competition for the benefit of consumers through regulation and oversight of corporations. Through the Sherman Act of 1890, the Clayton Act of 1914 and the Federal Trade Commission Act of 1914, the government has primarily protected the consumers through 1) prohibiting collusion amongst firms and the formation of illegal cartels, 2) preventing mergers and acquisitions of corporations that would lessen competition, and 3) prohibiting the creation of a pure monopoly and subsequently the abuse of monopoly power.
Yet, despite the general agreement of the purpose of antitrust policy, the enforcement of antitrust laws are at what Jay Levine and Devan Flahive refer to as a “tug-of-war.” One debate, Levine and Flahive note, revolves around the (necessary?) shift from the “structure-conduct-performance model and conglomerate merger theory” to the Chicago School views of dependence on “price theory lens and…faith in the efficiency of markets.” Subsequently, we shall explore the shortcomings of price theory in The Antitrust Paradox.
THE ANTITRUST PARADOX: WHY PRICE THEORY FAILS
Widely regarded as the most cited book on antitrust, Robert Bork’s The Antitrust Paradox shifts the narrative of the purpose of antitrust laws to simply be of efficiency and consumer welfare, with an emphasis on the latter. Bork heavily criticized the methods of protecting consumers, such as vertical agreements and price discrimination, which he asserts does not actually harm consumers, and therefore prohibiting such practices is paradoxical. The issue with relying heavily on price as a measure of harm to consumers is the use of monopoly power—defined as a company’s ability to set prices above marginal cost—as companies with such power are generally expected to operate by reducing output and increasing price. Contrastingly, Professor Armentano noted that dominant firms identified by antitrust cases operate precisely in the opposite conduct and performance that conventional monopoly theory suggests: gain and hold market share by lowering prices and increasing outputs. For example, in attempts to monopolize, firms may operate through predatory pricing, or undercutting, by setting meager prices for goods and services with the intention to acquire new customers, drive out competitors, or create barriers to entry. By sacrificing short-term profits, firms ideally obtain more monopoly power in the long-run. Thus, predatory pricing practices are considered anti-competitive under competition law—albeit tricky to discern from legitimate price competition—and can result in antitrust claims.
Concurrently, there is evidence that predatory pricing practices often fail miserably and have not in any instances led to a legitimate monopoly, leading some economists to suggest that if anything, predatory pricing is good for price competition and thus the consumer. For consumers, a low price is preferred, but conversely, this low price may come in the form of anti-competitive monopolization practices, which may or may not actually lead to the abusive exercise of monopoly power. Here we can see the antitrust paradox: legal intervention instead artificially raises prices by protecting inefficient corporations from price discrimination competition. And so to reiterate: the goal of antitrust policy is to reduce anti-competitive practices by firms while protecting the consumer’s overall welfare. Economists have and will continue to argue both sides of price theory for antitrust, and so examining how price affects consumers in this ambiguous framework ultimately fails to achieve anything.
CONCERNS OVER GROWING DOMINANCE OF DIGITAL PLATFORMS
How big is too big? That is a central question that Ip raises in the growing dominance of tech giants. He notes that if antitrust policy is intended to protect the consumer, then right now “there isn’t a clear case for going after big tech…[because] they are driving down prices and rolling out new and often improved products and services every week.” However, he does make an important distinction that these price benefits may only be short-term. The issue revolves around how these tech giants will affect competition and innovation from other firms that may feel disengaged in the market. For instance, in 2011, Google was in the midst of a lawsuit by Yelp Inc. and the FTC in violation of antitrust. Yelp CEO Jeremy Stoppelman deemed Google as “misusing Yelp review content in their competing Places product and by favoring their own competing Places product in search results.” Other companies including Microsoft and their search engine Bing, TripAdvisor, and Expedia have cited similar complaints of Google manipulating search results causing “real harm to consumers and to innovation in the online search and advertising markets.”
The growing dominance of modern digital platforms is apparent, but exactly how uniquely positioned they are in the monopoly power framework is not as evident. These tech giants utilize network effects: people use Facebook and Instagram because other people and celebrities use Instagram; content creators upload on YouTube because other content creators are on YouTube; and everyone buys Amazon because everyone also sells Amazon. Because of their network effects, tech giants Apple, Google, Facebook and Amazon continuously rank as the world’s most liked brands: 86 percent and 80 percent of Americans hold a favorable view of Google and Amazon, respectively. However, Kevin Carty asserts that it is not merely the monopolistic power these tech titans hold as networks, but the unique transparency—or even complete secrecy—of their power as digital platforms. Carty is adamant about the negative implications of the American economy due to these tech giants. He notes that recorded music revenue fell from $40 billion to $15 billion between 1999 to 2014 (adjusted for inflation) and full-time authors’ incomes have declined from $25,000 to $17,000 between 2009 and 2015, deeming Google, Spotify, and Apple’s monopolistic position in music, and Amazon’s monopolistic power in driving down prices as primary catalysts, respectively.
Although most people agree that innovation in the long-run increases productivity and invigorates the economy, the rise of these digital platforms has produced a unique form of invisible monopolistic power that no one is discussing or understands. These innovative platforms ultimately boost the overall economy but subsequently create a shift of economic power from competition to concentrated centralized platforms as we have seen with Google with data, Facebook with networks, and Amazon with e-commerce, and as we are currently seeing with the rise of UBER centralizing taxi-transportation, AirBnB with hospitality, and Netflix with content.
CONCLUSION: SOLUTIONS? AND THE REVIVAL OF THE LUDDITE FALLACY
Tim Harford in his book Fifty Inventions that Shaped the Modern Economy suggests a similar potential drawback of innovation: does it genuinely benefit everyone, or do we need to review the Luddite Fallacy? Carty cites history for how we might be able to approach these tech giants:
In 1911, the US government broke Standard Oil [a traditional monopoly] into 34 pieces after the company monopolized 90 percent of the US oil market. Google now controls 92 percent of the global search-engine market but is still allowed to expand. The only way to tame America’s tech goliaths is to see them for what they are—monopolies—and go after them using antitrust law. (Carty, NY Post 2018)
The overall consensus seems to be to remain attentive in preventing tech giants from vertical mergers or acquisitions of potential competitors, protect healthy innovation (and aware of Luddite Fallacy, see note 1), and protecting the overall economic welfare of the consumers notwithstanding price theory. However, the solution may not be so simple. As mentioned, these tech giants are not traditional monopolies—the network effect is difficult to reverse once companies have gained ground. Recently, the FTC has announced the emergence of a task force to more actively oversee potential antitrust violations in the broader sense of the tech industry. Ultimately, we might not actually have much power to do anything about the invisible network effects of these monopoly tech titans, unless an overall consensus for change occurs—but it would be difficult to garner a majority following to reject cheap, cool, and innovative technology. Perhaps attempting to regulate The Four is futile, and Galloway’s solution is the way: break up big tech. For now, one can only hope that this FTC task force proves to be effective in preserving competition, stopping the invisible monopolistic dominance of tech giants, and hopefully—and perhaps most importantly—keeping the Luddite Fallacy of mass unemployment caused by technological progression just that, a fallacy.
1) The “Luddite Fallacy” is the view that those concerned about long term mass unemployment caused by technological innovation replacing the workforce is committing a fallacy as they fail to realize the overall productivity benefit of technological progress. The term “Luddites” is based on the 19th-century example of weavers and textile workers who smashed mechanical looms in England in fear that new technology would create unemployment. Although employment increased during the industrial revolution, the Luddites were rightly fearful in that the machines made them poorer, as technology allowed cheaper and less skilled workers to replace the skilled workers. In a modern-day example, the fear is of big tech giants replacing much of the labor force with robots, artificial intelligence, and digital platforms.