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Antitrust

The Times’ Elastic Conception of Monopoly

Pressure groups, too, used ideological symbols for selfish ends, sometimes to mask operations that were completely at variance with the professed ideals. [That] made it difficult to follow the struggle, define positions, and identify the participants.

Ellis W. Hawley, The New Deal and the Problem of Monopoly 36 (Fordham Univ. Press 1995) (1966).

As I have been arguing for some time now, the press’s antitrust crusade against Amazon, Google, and Facebook is about protecting competitors, not competition. The press is only really interested in protecting two groups of competitors in particular, newspapers and publishers, the firms that give a livelihood to the writers who have created this crusade.

But movements grow through the building of coalitions, and writers have worked feverishly to sell their crusade as protection for all competitors of Amazon, Google, and Facebook, and not just those that hire writers in particular. The result has been a series of articles about small businesses and startups that have felt competitive pressures from the three tech giants.

The most recent of these illustrates beautifully writers’ failure to understand that harm to competitors, whether writers or anyone else, is not the same thing as harm to competition.

Prime Leverage: How Amazon Wields Power in the Technology World,” which appeared in The New York Times, tells the story of Elastic, a cloud-computing startup that introduced an innovative search tool that Amazon at the time did not offer. What happened next is exactly what you would expect of a healthy, competitive market. But the Times finds it all very sinister.

When Amazon saw that Elastic had created a superior product, Amazon did what competitors are supposed to do in competitive markets. Amazon copied the product as best it could, and introduced its own version into the market.

Copying, so far from being evidence of monopolization, is actually the market economy’s principle defense against monopolization. When a firm introduces a superior product, the firm in effect takes consumers hostage, because consumers face only inferior products as alternative purchase options. That allows the innovative firm to charge consumers a monopoly price for the superior product.

Copying naturally limits the innovator’s monopoly power. As competitors copy or even improve upon the innovator’s product, consumers start to enjoy an increasing number of alternatives of equal or superior quality, and the prices the innovator is able to charge for the product fall.

Amazon’s move to copy Elastic’s product limited Elastic’s pricing power, preventing the company from charging monopoly prices for the tool. No doubt that made Elastic’s founders very sad. Tech startup culture has accustomed startup founders to the expectation that they will be able to generate monopoly profits from their innovations, and become fabulously wealthy as a result.

But as progressives have been arguing for a long time now, such out-sized profits are neither necessary incentives to induce entrepreneurs to innovate, nor fair. The presence of large incumbents in startup markets who are able to compete away monopoly profits quickly is good for the economy, and the distribution of wealth. Note that to win the competition with Elastic, Amazon can’t charge monopoly prices for its version of Elastic’s search tool, so neither Amazon nor Elastic generate monopoly profits from this technology. Consumers are the principal beneficiaries of Amazon’s ability to copy competitors’ products quickly and effectively.

Now, one might worry that Amazon’s copying of Elastic’s product might ultimately harm competition by driving prices so low that Elastic is not able to recoup its costs of innovating, effectively sending a signal to the market that innovation no longer pays because Amazon will steal the fruits.

But this concern isn’t about the presence of excessive monopoly power–Amazon’s or anyone else’s–but rather a concern about excessive competition. Indeed, it’s a concern about the ability of innovators to capture the benefits they confer on the economy despite competitive pressures.

If an innovation is too easy to copy, then the innovator will enjoy only a very short period of exclusivity in the market, and may not be able to recoup its development costs before competition sets in and prices fall to modest levels. The law handles this problem by creating intellectual property rights, which allow innovators to enjoy legally-guaranteed exclusivity for a set period of time or under certain circumstances. Elastic clearly was not able to patent its search tool, and Amazon was clearly able to invent around any trade secret or copyright protections enjoyed by Elastic.

What this all means is that the intellectual property laws don’t view Elastic’s tool as the kind of innovation that needs extra legal protection from copying. From the law’s perspective, Elastic will do just fine on its own, thanks to the low cost of developing new software tools and the advantages in brand recognition and follow-on innovation that Elastic enjoys from being a first mover with respect to this technology.

That is just what seems to have actually happened in Elastic’s case. Although the first paragraphs of the Times article lead the reader to expect news of Elastic’s bankruptcy by the end of the story, the paper is forced eventually to admit that “Elastic . . . went public last year and now has 1,600 employees,” up from 100 when Amazon first copied its tool. So Elastic didn’t need intellectual property protection to earn enough from its innovations to thrive, despite competition from Amazon. (The article informs us that Amazon did violate Elastic’s trademark by giving its tool the same name as Elastic’s. Trademark law will provide Elastic with compensation, in the form of lost profits, for that infringement.)

This is exactly how you want competition to function. New firms enter markets by introducing innovative products, and competition from incumbents struggling to catch up prevents the new firms from growing into monopolies themselves, but at the same time does not drive them out of the market.

The story of Elastic is a story of healthy competition that benefits society as a whole, but not, of course, Elastic, which would much rather have faced no competition from Amazon at all. The Times notes that startups refer to Amazon as engaging in “strip mining” when the firm copies the products of competitors. Of course, every firm would prefer that competitors never be allowed to copy their products, because that would give every firm a permanent monopoly in the technologies that the firm innovates. To the startup entrepreneur who wants an easy path to tech riches, all competition is “strip mining.”

But preventing copying is not good for America. That the Times would seem to be promoting this sort of innovation-based monopolization, despite the paper’s advocacy of antitrust enforcement against Amazon, reflects the contradictions inherent in any attempt to use the antitrust laws to protect competitors rather than competition. Protecting competitors means giving them monopolies. Protecting competition, by contrast, means leaving competitors to sink or swim.

There are more contradictions. The Times seems, for example, not to realize that the fact that Amazon dominates cloud computing must surely have resulted in more protection, and less competition, for Elastic, than Elastic would have enjoyed in a less concentrated market. The less concentrated the market, the greater the number of firms in a position to copy an innovation, and the more severe the resulting price competition is likely to be.

Because Elastic’s only competitor was Amazon, the market was a duopoly, and duopoly market pricing can be much closer to the highs of monopoly pricing than to the lows of competitive pricing. That might explain why Elastic was able to recoup its development costs, grow exponentially, and successfully go public despite Amazon’s sale of an essentially identical product to that offered by Elastic.

The Times also suggests that the fact that Amazon both owns the cloud servers used by most internet firms, including Elastic, and also competes in the market to provide software services for use on those servers, is inherently anticompetitive. The notion that firms should not be allowed to compete on their own platforms is probably the most embarrassing and superficial effusion of the press’s crusade against Amazon, Google, and Facebook.

For all businesses are nothing more than collections of platforms, from the vast majority of which every business excludes competitors (think of office space). To prohibit competition on one’s own platform is to prohibit productive activity entirely. The fact that Amazon has decided to throw open its cloud servers–which the firm initially developed exclusively for its own use–to competitors is an act of great pro-competitiveness, not the opposite.

That Amazon may have used information about Elastic’s tool that Amazon could only have generated from its administration of the servers that Elastic used to run the tool is hardly anticompetitive. To the contrary, that allowed Amazon to accelerate the copying process and introduce competition into the market for that tool more quickly than the company might otherwise have been able to do. If that is too much competition for Elastic, then the intellectual property laws can be changed to provide software tools with more protection than they receive today. The fact that Elastic did not succumb to this competition, but thrived, suggests, however, that more intellectual property protection–more monopoly for Elastic–would not be appropriate.

One problem with the press’s crusade against Amazon, Google, and Facebook has been a failure to recognize that these companies’ size makes them more efficient, and that breaking them up would therefore result in a net loss for society. From this perspective, the press is calling for more competition where competition would not be a good thing. But in the Times’s defense of Elastic, there is something quite different: the promotion of monopoly–saving Elastic from competition from Amazon–where competition would be more appropriate.

The only way to understand the press’s adherence to these inconsistent positions–promoting competition here, monopoly there–is as a desire to have the antitrust laws pick winners and losers in the market according to the press’s own particular set of special interests and political preferences.

Is the press aware that it is ultimately trying to do that?

You bet.

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