Categories
Antitrust

The Antitrust Laws Give Chicago Cabbies a Remedy

The New York Times is reporting that New York taxi companies bought hundreds of Chicago taxi medallions–enough to jack up medallion prices–and then turned around and sold them to cabbies, earning monopoly profits. Many cabbies borrowed to buy the medallions and have gone bankrupt.

If the New York companies’ purchase of large numbers of medallions really did give them the power to raise prices, then those companies achieved monopoly power for purposes of the antitrust laws, which define it as the power profitably to raise prices.

It’s not illegal to charge monopoly prices. But it is a violation of Section 7 of the Clayton Act to assemble a monopoly through asset acquisitions, such as the purchase of taxi medallions.

The U.S. Department of Justice and the U.S. Federal Trade Commission have the power to challenge anticompetitive acquisitions after the fact. And they can seek disgorgement of profits, which here would mean an order requiring the New York companies to compensate cabbies for the inflated prices that they paid. The article suggests that in some cases those prices may have been eight times the competitive prices, or $350,000 in monopoly excess per medallion.

The Times suggests that much of the alleged conduct took place six or more years ago. But for civil antitrust actions brought by the government, there is no statute of limitations.

It may also be possible to challenge this conduct as fraud, or market manipulation. But this is a case of the raw acquisition of monopoly power, without any semblance of an efficiency justification, placing it squarely within the core of the antitrust laws. It would be nice to see those laws earn their keep here.

And to see antitrust enforcers return to policing local and regional monopoly power.

Categories
Antitrust

Google’s DNS-Over-TLS Is Good Because Competition in Advertising Is Bad

AT&T and Comcast are complaining to House antitrust investigators that Google’s plan to encrypt DNS, the internet’s addressing system, will prevent AT&T and Comcast from snooping on web traffic that will remain transparent to Google, giving Google a competitive advantage in targeting advertising to consumers.

AT&T and Comcast may be right that DNS-Over-TLS will give Google a competitive advantage, but that’s good for consumers, not bad. Because advertising undermines consumer sovereignty, and more competition in the targeting of advertisements means more targeted advertising.

That is the irony of antitrust scrutiny of Google’s power in the advertising market more generally. Advocates of greater antitrust enforcement seem to think that smashing Google’s advertising monopoly will somehow increase privacy and benefit the public. They’re wrong.

It is a staple of antitrust economics that more competition means more output, and in the market to use consumer data to target advertisements, that means more targeted advertising. Google, Comcast, and AT&T will race to hoover up every last bit of consumer information, subject it to the most sophisticated data analysis methods known to science, and use the insights generated thereby to induce consumers to buy their clients’ brands. (Of course, Google, Comcast, and AT&T may compete with each other to offer privacy protections to users, but that can go only so far, because they also compete with each other for advertising dollars based on the amount of data on consumers they can leverage to target ads.)

Competition is great in markets that produce products that benefit consumers. But it is terrible in markets that produce products that harm consumers, because it makes those markets more productive. That’s why the tobacco oligopoly was a good thing. And that’s why the 21st Amendment, which repealed Prohibition, gave the states the power to promote monopolization of the distribution of alcohol.

And targeted advertising really is bad for consumers. As I pointed out not long ago (summary here), the information age has eliminated the sole economic justification for advertising–that it provides consumers with useful product information that they cannot find anywhere else–leaving advertising with a single functional use for firms: to manipulate consumers into buying products that they do not really prefer (otherwise the advertising wouldn’t be needed to induce them to buy the products). Targeted advertising magnifies this manipulative power.

As recently as the late 1970s, antitrust enforcers in the United States understood that advertising’s manipulative function harms competition, by putting firms that produce products that consumers do in fact prefer at a competitive disadvantage. In that period, the FTC brought, and sometimes won, a series of cases against large advertisers, arguing that their attempts to promote their products were anticompetitive.

The FTC did not bring those cases against firms that distribute advertising, which at that time were mostly newspaper and television companies. The FTC brought those cases against the firms that paid those newspaper and television companies to distribute their advertising. Because the FTC understood that the competitive threat posed by advertising is not that the platforms that distribute ads tend toward monopoly, but that the advertising those platforms distribute itself undermines competition in the markets in which advertised products are sold.

In other words, in the 1970s, antitrust enforcers understood which level of the advertising distribution chain to target in order to benefit consumers. Today, the House seems fixated on the wrong level, on the platforms that distribute advertising rather than the markets in which advertising is deployed to harm competition.

That fixation may be due to the influence exerted by the newspaper industry on the House investigation. The market to distribute advertising tends toward monopoly because size is an advantage: the more eyeballs you can reach, the more valuable is your platform to advertisers. For most of the 20th century, newspapers ran the advertising distribution monopolies. But Google beat them–and took over as advertising monopolist–by offering a better product to advertisers. The newspapers look to have turned to antitrust enforcers to try to get back into the game.

That should make consumers, and anyone worried about privacy, very concerned. Because it means that the new antitrust movement isn’t about consumer welfare, or privacy, but about ensuring that newspapers and telecoms get their fair share of consumer data and consumer exploitation.

And that brings me back to DNS-Over-TLS. Today, the non-encryption of DNS lets any firm on the internet, including Google, AT&T, and Comcast, snoop on your internet usage. DNS-Over-TLS would limit the snoopers to Google. That’s a net gain for consumers, and anyone concerned about privacy, which is why it is supported by the non-profit Mozilla Foundation, which makes the Firefox web browser, as well as the Electronic Frontier Foundation. To the extent that DNS-Over-TLS helps Google protect its advertising distribution monopoly against new entrants like AT&T, the technology harms competitors, and will allow Google to continue to extract high fees from firms that buy advertising. But higher fees mean fewer ads, which is good for consumers.

If we see the House move against this technology, we’ll know for sure whose side it is on.

Categories
Antitrust Monopolization Regulation

Cost Discrimination

One hears constantly about the power of technology to enable the consumer-harmful practice of price discrimination, which is the charging, to each consumer of a given product, of a price equal to the maximum that the consumer is willing to pay for that product. But one hears very little about the power of technology to enable the consumer-beneficial practice of cost discrimination, which is the foisting upon each firm of a price equal to the minimum that firm is willing to accept in exchange for selling a given product.

That’s not because the technology isn’t there. In fact, because big business invested in supply chain automation long before the tech giants made possible the snooping needed to identify consumer willingness to pay, the technology needed for cost discrimination is more developed than the technology needed for price discrimination. The reason we don’t hear about cost discrimination is that the technology needed to implement it is in the hands of firms, rather than the consumers who would benefit from cost discrimination.

This state of affairs isn’t surprising, since firms are few relative to consumers, and therefore more likely to have the pooled resources and capacity for unified action needed to invest in and implement a discrimination scheme. Yes, consumers have review websites, and price aggregators, but that’s a far cry from the centralized acquisition and analysis of data, and the ability to bargain as a unit based upon it, that firms enjoy.

One way for consumers to implement cost discrimination would be by organizing themselves into data-savvy cooperatives for purposes of negotiating prices with firms. Another would be for startups to step in as middlemen, taking a cut from consumers in exchange for engaging in data-based bargaining on their behalf.

But another solution is for the government to create an administrative agency with the power to regulate consumer prices. It turns out that there is ample precedent for government price regulators to dictate cost-discriminatory prices.

Here, for example, is an account of the Federal Power Commission doing just that for wellhead natural gas rates in 1965:

Pricing designed to encourage supply could also create “economic rents” (profits above a normal return) for gas producers with old, inexpensive reserves. Neither the producers’ brief for fair field prices nor the staff’s preference for rates based on average historical costs seemed acceptable or sufficient. It was the young economist Alfred Kahn, serving as an expert witness, who suggested a two-tied pricing structure: separate prices for old gas and new gas. Here, from the commission’s perspective, was an ideal political, and perhaps economic, solution. “The two-price system,” wrote the commission, “thus holds out a reward to encourage producers to engage in further exploration and development while preventing excess and unnecessary revenues from the sale of gar developed at a period when there was no special exploratory activity directed to gas discovery.”

Richard H.K. Vietor, Contrived Competition: Regulation and Deregulation in America 113-14 (1994).

The old gas here corresponds to inframarginal units of production and the new gas corresponds to marginal units of production. Economists were once acutely aware of the problem that even under perfect competition the inframarginal units can enjoy a windfall at the competitive price, so long as the cost to their owners of producing those units happens to be below the cost of the marginal units, which determine the competitive price.

David Ricardo famously explained all of English aristocratic wealth in these terms. The aristocrats take the best land by force, he observed, and cultivation of that land is relatively inexpensive, because it is the best land. The rest take land that is more expensive to cultivate. Because the competitive price for agricultural goods must be high enough to pay the higher cost of cultivating the poorer-quality, hence marginal, land, the price must then be above the cost to the aristocracy of cultivating the best land, leaving the aristocracy with great profits.

Just so, the FPC worried that the producers of the old gas, who had come upon the gas only as an accident as part of explorations for oil, and therefore had incurred a gas exploration cost of zero, would enjoy a windfall if prices were set to cover the costs of bringing new gas from the ground through dedicated and costly explorations. So the FPC approved prices that discriminated against the old gas producers based on their lower exploration costs.

Consumers don’t know enough about the costs incurred by the firms that sell to them to insist on low prices when buying from firms with low costs. Which is why I suspect that government price regulation will be the only way for consumers eventually to enjoy some of the pricing-based fruits of the information age.

Categories
Antitrust

John Bates Clark’s Peculiar Case for the Distributive Justice of the Perfectly Competitive Market

The argument for the efficiency of the perfectly competitive market is familiar: large numbers of firms selling an undifferentiated product will compete price to marginal cost, ensuring that everyone who can afford to pay the cost of production gets access to the product.

But is the distribution of wealth between buyers and sellers that is created by marginal cost pricing fair?

Today, economists agree that the distribution of wealth created by marginal cost pricing is entirely arbitrary. For the distribution of wealth is determined by inframarginal units of production, not marginal units. The benefit to me of the tenth unit of production of a particular good might be $10, and that might be just equal to the marginal cost of producing the tenth unit, making the market price under perfect competition in turn $10. But the gain I get from buying all ten units is determined by the value to me of each of the first nine units I purchase, not the marginal tenth, and the value I get from the first nine may be very much higher than $10. If I get $20 of enjoyment from each of the first nine units, then my gain from my purchase of ten units, net of the price of $10 that I pay for each unit, is $90. If the marginal cost of production is a constant $10 over all units, the gain to the producer is $0. That’s hardly fair to the producer. All of the gains from trade, defined as the difference between the value conferred on consumers by production and the costs of that production, go to me. Even though price is set equal to marginal cost.

It is for this reason that a century ago economists rejected the promotion of competition as a means of guaranteeing a fair distribution of wealth. They embraced competition because it is efficient–I am able to purchase every unit for which I am willing to pay the cost of production, so the economy produces all of the gains from trade of which it is capable–but they recognized that some other means was needed to achieve a fair distribution of wealth. That other means was the tax system. Raise my taxes by $45 and reduce the producer’s by $45 and now the gains from trade are distributed equally between us.

Given our current understanding of the distributive importance of inframarginal units of production, it is startling to discover that a century ago John Bates Clark, a giant of conservative economics, made a vigorous case not just for the efficiency but also for the distributive justice of perfectly competitive markets. His distributive case was rejected almost as soon as it was made, and has since sunk into obscurity. But that leaves me wondering: How could Clark have been unaware of the fact that the distribution of wealth is determined by inframarginal units, not marginal units? Did he just not understand marginalist economics? The few contemporary scholarly discussions of Clark’s work that I have encountered fail to explain.

The answer, it turns out, is that Clark understood marginalism, and the argument that inframarginal units determine the distribution of wealth. But he thought he had a convincing rejoinder. Here he is in his magnum opus, The Distribution of Wealth:

The man that we are studying is a society in himself: he makes things and he alone uses them. [The value to him of the last unit that he produces] measures the effective utility of everything that he makes. Though [the value to him of the first unit that he produces] may measure the absolute benefit conferred by the loaf that satisfies hunger, the real importance of having that loaf is far less. If this necessary article were taken away, the man would devote a final hour to bread-making, and would go without the article otherwise secured by that final increment of work. Destroy his day’s supply of food, and what he goes without will be luxuries naturally secured by the terminal period of labor. [The value to him of the last unit that he produces] measures the utility of those luxuires, and it measures therefore the effective service rendered by the supply of necessaries that are produced in an equal period of work. Any [inframarginal unit] will have a true importance measured by [the value to him of the last unit that he produces]; since, if it were lost, there would be diverted to the replacing of it some work that would otherwise secure an article having an importance measured by [the value to him of the last unit that he produces]. As it is of no more real consequence to the man to keep one of these articles than it is to keep any other, [the value to him of the last unit that he produces] measures the subjective value of each of them. . . . Bread and the other necessaries of life are absolutely more important than jewelry and other luxuries; but in effective utility the complements are all on a par, since, if any one of them were destroyed, the result would be to make the community go without the last.

John Bates Clark, The Distribution of Wealth: A Theory of Wages, Interest, and Profits 385, 388 (1914).

Clark’s argument is that if any one of the inframarginal units (Clark calls this bread, or another necessity, to illustrate that it is valued more highly than the marginal unit) is destroyed, the only actual unit that disappears from production is the marginal unit (Clark calls the marginal unit a luxury good to illustrate the fact that the consumer values it less than inframarginal units), because one unit is subtracted from output. Because consumers lose the value of the marginal unit when the inframarginal unit is destroyed, it follows, according to Clark, that the true value of the inframarginal unit is actually the value to the consumers of the marginal unit.

That allows Clark to treat all inframarginal units as having no value to the consumer that is separate from the value of the marginal unit, which is to say that it allows him to ignore entirely the value of inframarginal units and to treat the value to the consumer of the marginal unit as the entire value of production. It then follows that because the competitive price equals both the value of the marginal unit to the consumer and the marginal cost of producing that additional unit, there is in fact no surplus generated by any transaction, and the consumer pays a price exactly equal to the value the consumer receives from production and the producer is paid a price exactly equal to the producer’s cost of production. Thus the problem of distributive justice is not so much resolved in a fair way by competitive markets as it is eliminated entirely, because under competition there are, according to Clark, no gains from trade at all, just a buyer and a seller who both subsist on a knife’s edge, buying and selling at a competitive price that leaves both just as well off as each would be had neither entered the market at all.

But is Clark right to argue that inframarginal units have no real value to consumers, because their disappearance would, individually, deprive the consumer only of the marginal unit?

Of course not. The enjoyment you get from eating your first scoop of ice cream is real, whether you eat a second scoop or not. And the enjoyment you get from eating your first scoop of ice cream really is greater than the enjoyment you get from eating your second scoop of ice cream, notwithstanding the fact that if your first scoop is somehow clawed back, you won’t be able to eat that second scoop and get the lesser enjoyment from it. Indeed, once that first scoop is clawed back, your second scoop becomes your first scoop, and your enjoyment of it goes up. That’s why monopolies restrict output. They know consumers place a higher value on the first few units they consume, allowing monopolies to charge them higher prices.

Clark’s argument implies that the more you eat, the less valuable your meal is to you, because the less valuable is your last bite. That’s highly counterintuitive. Few would prefer a cracker for dinner to a four course meal, even if the last bite of that four course meal is worth less to them than would the first bite of that cracker. So why did Clark come up with such a view?

It seems to me that the strangeness of Clark’s theory is a measure of the level of disappointment felt by those who believed in the justice of competitive markets at the implication of the marginalism that the distribution of wealth in competitive markets is arbitrary. True, marginalism validated the Adam Smithian faith in the efficiency of competitive markets. But what had always been at stake in economic debates was the morality of the market, and this marginalism could not prove.

Clark’s failure to prove the distributive justice of the competitive market is a warning to those today who would promote greater antitrust enforcement and competition more generally as a solution to economic inequality. Indeed, the progressives of Clark’s own day, who were profoundly concerned about economic inequality, tended to reject antitrust and competition as solutions.

Categories
Antitrust Monopolization Regulation

It’s about Price, not Competition

One thing we are going to encounter a lot as the anti-big-tech crusade gets under way is the confusion of pricing problems with competition problems. Consider the attack on Apple’s promotion of its own apps on its App Store. This looks like a competition problem: Apple is using its proprietary App Store infrastructure unfairly to promote its own products over those of rivals. Get a court applying the antitrust laws to order Apple to stop doing that, and, it appears, the problem is solved.

Only it’s not solved, because the heart of the problem is not Apple’s creation of an unlevel playing field in app competition. The heart of the problem is that Apple owns the App Store itself.

And for that problem, there is no competitive solution. As Chicago School scholars pointed out long ago, if a company has a monopoly on upstream infrastructure, the company can use that monopoly to extract all of the profits from downstream businesses that rely on the infrastructure, by charging high fees for access.

So long as Apple retains the power to set the fees that it charges software developers for selling apps through the app store, Apple will be able to suck all the value out of those downstream businesses. Forcing Apple to let those businesses compete with Apple’s own apps on a level playing field will not solve the problem because app developers will still need to pay Apple a fee for access that Apple has discretion to set.

Indeed, it is a mistake to think that Apple’s promotion of its own apps on the app store reflects anticompetitive intent. Because Apple could extract all of the profits from competing developers through fees, even without selling any apps of its own, Apple’s reasons for selling its own apps in the App store, and indeed for promoting them over rival apps, can only have other purposes. Most likely, for a firm that has repeatedly demonstrated the desirability to consumers of tight integration of product components, Apple sells its own apps, and promotes them preferentially, because Apple believes that its own apps are actually better, and that when consumers search for new apps, consumers want to know if Apple has a relevant offering. (I know I do.)

What should trouble us about the App Store is not that Apple manages competition on that platform–the company has every reason to do that with a view to making consumers happy–but rather that Apple’s control of the platform allows the company to extract all of the gains created by the platform for itself through fees, leaving relatively little for other app developers, or for consumers themselves.

The only way to solve that problem using competition would be to lessen Apple’s control over the App Store itself. But doing that would destroy the closed app ecosystem that has differentiated the iPhone positively in the minds of consumers from the mayhem and unreliability of Android phones. Letting iPhone owners install apps from anywhere is a recipe for trouble.

In the App Store, as in most tech platforms, we have an efficient market structure. But a monopolistic one. That means that complaints about fairness ultimately must amount to complaints about price, not competition. The solution can therefore only be price regulation, not antitrust.

Categories
Antitrust

Antitrust Blowback

The New York Times spent the spring and summer brazenly promoting antitrust enforcement against its own enemies, Google, Facebook, and Amazon, even though those companies are hardly in the first rank of firms in need of the antitrust hammer. (Telecoms, anyone?) All three are implicated in a decline in writer earnings, thanks to the competition the three have brought to the newspaper and publishing industries, and the Times seemed to want to put a stop to that.

But now the Times is shocked to find that the Trump Administration is engaging in a “cruel parody of antitrust enforcement” in its investigation into the car companies that have worked with California to improve emissions standards. The Administration’s apparent view that the car companies are guilty of collusion is, according to the Times, “[a] nakedly political abuse of authority.” That’s rich given the Times’s own apparent efforts to exploit the antitrust laws for private gain.

Where, incidentally, was the Times’s charge of foul motives when the Trump Administration opened antitrust investigations into Google, Facebook, and Amazon this summer? Absent, of course. The Times celebrated the opening of those investigations knowing full well that President Trump harbors animus toward each of those three liberal corporate bastions, and indeed knowing that the only antitrust case in which the Trump Administration had shown any interest so far was the politically-motivated attack on a merger involving Trump enemy CNN.

Categories
Antitrust Monopolization World

The Lord Grand Secretary on Regulated Monopoly

The present plan for unifying the salt and iron monopoly is not alone that profit may accrue to the state, but that in the future the fundamental of agriculture may be established and the non-essential repressed, cliques dispersed, extravagance prohibited, and plurality of offices stopped. In ancient times the famous mountains and great marshes were not given as fiefs to be the monopolized profit of inferiors, because the profit of the mountains and the sea and the produce of the broad marshes are the stored up wealth of the Empire and by rights ought to belong to the privy coffers of the Crown; but Your Majesty has unselfishly assigned them to the State Treasurer to assist and succor the people. Ne’er-do-wells and upstarts desiring to appropriate the produce of the mountains and the seas as their own rich inheritance, exploit the common people. Therefore many are those who advise to put a stop to these practices.

Iron implements and soldiers’ weapons are important in the service of the Empire and should not be made the gainful business of everybody. Formerly the great families, aggressive and powerful, obtained control of the profit of the mountains and sea, mined iron at Shih-ku and smelted it, and manufactured salt. One family would collect a host of over a thousand men, mostly exiles who had gone far from their native hamlets, abandoning the tombs of their ancestors. Attaching themselves to a great house and collecting in the midst of mountain fastnesses and barren marshes, they made wickedness and counterfeiting their business, seeking to build up the power of their clique. Their readiness to do evil was also great. Now since the road of recommending capable men has been opened wide, by careful selection of the supervising officers, restoring peace to the people does not wait on the abolition of the salt and iron monopoly.

Esson M. Gale, Discourses on Salt and Iron : A Debate on State Control of Commerce and Industry in Ancient China, Chapters I-XIX: Translated from the Chinese of Huan K’uan with Introduction and Notes 34-35 (1931).
Categories
Antitrust Monopolization

Amazon’s Problem Is Too Much Competition, Not Too Little

Amazon has come under assault in recent weeks for failing to keep “thousands of banned, unsafe, or mislabeled” products sold by third parties off of its site. The New York Times, which has been acting as a mouthpiece for the Authors Guild in its crusade against Amazon, has focused on the sale of knock-off books. But The Wall Street Journal has shown that the problem extends across multiple product categories, and concludes that “Amazon has ceded control of its site.”

The great irony here is that this is proof that Amazon is being too open to competition, not, as Elizabeth Warren, the Open Markets Institute, and the Times have been arguing, too closed to it.

Unlike, say, Apple, which designs virtually every component of its phones, Amazon chose early on to platformize its business. When it created a useful cloud service to support its ecommerce website, Amazon opened the platform, called Amazon Web Services, to the market, turning it into a successful business in its own right. Amazon is doing the same thing with package delivery, allowing anyone with a car and an app to deliver packages for the company. And of course Amazon platformized its own ecommerce website, allowing third party sellers to list and sell products through Amazon.com.

Of course, Amazon could have taken a more traditional route. It could have kept its cloud services to itself. It could have continued to contract out its package delivery business to a single vendor, like UPS. And it could have remained the only retailer on its own ecommerce website. If it had, it is hard to see how Amazon would have come in for criticism from the big tech breakup crowd. Just as nary a peep has been heard about the fact that Apple insists, for example, on designing its own iPhone CPUs.

But Amazon instead did what competition advocates are supposed to want: the company threw open virtually every component of its business to competition. As a result, however, it has been attacked by Elizabeth Warren and others for failing to go even further, and to stop using its own platforms entirely. Under their approach, it is not enough, for example, to allow others to use Amazon Web Services. Amazon must stop using those services itself, otherwise in operating them there is a danger that Amazon will favor its own downstream businesses. Amazon might, for example, tank Walmart’s cloud access in order to get competitive advantage in retail. Similarly, Amazon should stop retailing products for its own account on Amazon.com, argues this group, because Amazon can alter the website to give its own products competitive advantage (by, for example, displaying them more prominently in search results).

So it is bitterly ironic to find Amazon now coming under assault for failing to exercise more control over the third party sellers who use its ecommerce platform.

The lesson here is two-fold. First, competition is no panacea. As policymakers learned in the mid-19th century, when economic liberalism first came on the scene, excessive competition means fakery, fraud, low quality, and boom and bust cycles that sow economic instability.

Second, antitrust and competition policy are not progressive projects. Progressives seek regulated environments. The big firm dictating standards and stamping out the chaos that is competition across all levels of its supply chain is itself a regulated environment. If a firm does not regulate the way progressives want, the solution for progressives is not to rip the firm apart as a petulant child would rip apart a disappointing toy, but to change the way that the firm behaves. Calling upon Amazon to do more to control what books third party sellers can sell through the company’s sites is a demand for less competition. If that sounds progressive, it is.

One more thing: The Times’s attack on Amazon for selling knock-off books highlights the political opportunism of writers–understood as an interest group–in recent antitrust debates. For at the same time that writers have wrapped themselves in the small-is-beautiful flag, attacking Amazon for destroying main street retail, they have seemed not to think twice about then turning around and attacking Amazon for failing to cast off from its website the small independent publishers of knock-offs that are competing directly, and successfully, with writers. At the end of the day, writers’ fight against Amazon is about protecting writers, not about promoting competition.

Categories
Antitrust

The Fundamental Unit of Competition Is Not the Firm

The fundamental unit of competition is the individual. In American economic lore, the best way to promote innovation is to minimize barriers to entry into markets and increase the rewards to market entry, to ensure that innovators can bring cutting-edge products to market, challenging old and creaky incumbents. In this story, the unit doing the entering is the firm–often visualized as a scrappy startup–and the market consists of one or more incumbent firms serving a particular consumer need with legacy technology.

But why can’t the startup be an individual person–an innovator–and the market be the interior of some great big bureaucratic firm, plus that firm’s own customers? You have an idea for a new product, you take it to your boss, your boss approves it, and the firm starts selling it to customers. There’s competition here, because you compete with other employees of the firm. If your innovation does well, you get promoted.

We all understand that competition of this kind–within-firm competition–works, because we’ve all experienced it, at least to some extent, at that vast bureaucratic organization known as school. You compete against your classmates for grades. And that drives ambitious students to work around the clock to succeed (at least, it was that way at my high school). Why can’t firms produce great innovators internally, in the same way?

One might object that the unit of competition must be the firm because only firms have the resources to implement an individual’s innovative ideas. An individual employee of a great multinational won’t have the resources he needs to develop an idea into a marketable product. By contrast, the argument goes, a startup can assemble the resources it needs to implement its vision simply by tapping funding, labor, and other markets.

But that doesn’t make sense at all. An employee at a big firm can call upon all of the resources of the firm, and the firm itself can seek additional financing, in transforming a bright idea into a marketable product. Indeed, you would expect that a large firm would be able to deploy resources in favor of an employee’s bright idea more efficiently than would a market, because the firm can realize economies of scale in providing resources to support the employee. The startup might need to hire its own accountant, lawyer, and so on, whereas the employee of the big firm could use the firm’s existing accounting and legal staffs for support, potentially filling excess capacity in those departments.

In other words, the big firm is itself a platform upon which competition can thrive, so long as the firm is organized in a way that promotes competition between employees in innovative thinking. While business schools do spend a lot of time studying how to promote innovation within firms, and the tech giants have wrestled with the problem of internal innovation quite a bit, neither antitrust legal scholarship, nor the industrial organization field in economics that serves as antitrust’s social scientific foundation, devotes any time–to my knowledge–to the problem of how to promote competition within firms.

One does find, in Arrow’s famous work on innovation, the following hint of appreciation of the possibilities:

There is really no need for the firm to be the fundamental unit of organization in invention; there is plenty of reason to suppose that individual talents count for a good deal more than the firm as an organization. If provision is made for the rental of necessary equipment, a much wider variety of research contracts with individuals as well as firms and with varying modes of payment, including incentives, could be arranged.

Kenneth Arrow, Economic Welfare and the Allocation of Resources for Invention, in The Rate and Direction of Inventive Activity: Economic and Social Factors 609, 624 (R. Nelson ed., 1962).

The failure to consider competition within firms reflects, in my view, a cultural blindspot borne of our American aversion to bureaucratic solutions, regardless whether they work. It is reasonable to suppose that sometimes, the best way to promote competition, and reap its benefits in terms of greater innovation, will come not by making it easier for startups to enter a market, but by insisting that the large firms that dominate the market organize themselves internally in ways that promote innovation. In such cases, rather than impose remedies aimed at promoting external competition, antitrust enforcers should impose remedies that promote internal competition.

One hint that failure to consider internal competition is essentially cultural comes in a study cited in F.M. Scherer’s great, dated, industrial organization textbook. The study shows that in the middle of the 20th century, innovation rates were comparable across countries that pursued different approaches to industrial organization. In British markets that were dominated by large bureaucratic firms, innovation tended to happen internally, within those large firms, whereas in less concentrated American markets, innovation tended to come from startups. Our preconceptions regarding where innovation is possible may be all that limits where our innovation actually comes from.

I’ve been perplexed by our arbitrary insistence that the firm is the basic unit of innovative competition for a long time. What got me thinking about this today is the story of the Australian rocket scientist who invented the black box used on airplanes. While working for a government aeronautical research laboratory, he was able to convince his boss to let him work on the project, albeit in secret because it did not directly contribute to the lab’s mission.

The story of the black box is not directly on point–it involves a government agency and an innovation that was not the product of competition between individuals within the agency–but it does show how an enterprising innovator can marshal resources within a bureaucracy to achieve the kind of from-scratch innovation that we typically associate with startups.

Categories
Antitrust Monopolization

When Writers are a Special Interest: The Press and the Movement to Break Up Big Tech

When Uber and Lyft brought competition to the Seattle taxi market, drivers fought back, asking the city to let them form a cartel to demand higher wages from rideshare companies. If that sounds anticompetitive, it is. But petitioning the government for protection from competition is also completely legal, because the courts expect that informed voters will make the right call about whether the petitioners need a bailout.

That system works well enough for cabbies, but not for another group that has been seeking government protection from competition of late: writers. In their role as journalists, writers give voters the information they need to make the right call about bailouts, but writers cannot be expected to do that dispassionately when they are the ones seeking government protection.

Over the past fifteen years, writers’ earnings have nose-dived thanks to competition from Google, Facebook, and Amazon directed at two of the main industries that employ writers: newspapers, which have lost advertising revenue to Google and Facebook, and publishers, which have lost the ability to dictate book prices as Amazon’s bookselling business has grown.

As a result, writers have quite understandably come to view these companies as a threat to their livelihood. Through the Authors Guild and the News Media Alliance, writers are calling for government protection from competition in the form of antitrust enforcement against Google, Facebook, and Amazon, and an antitrust exemption for newspaper cartels.

But writers’ views on big tech have also carried over into their reporting, making it hard for the public to judge whether government aid is warranted. I will focus on reporting by The New York Times that appears to me—as an antitrust scholar—to be colored by writers’ sense of professional vulnerability to the tech giants. But examples can be found in many other sources.

A Bully Pulpit

One expression of the strength of anti-tech feeling at the Times is the sheer volume of Times reportage suggesting that Google, Facebook and Amazon should be broken up or otherwise prosecuted under the antitrust laws.

In the first seven months of 2019, the Times published more than 300 articles mentioning Google, Facebook, or Amazon and antitrust, including an Op-Ed by a Facebook founder calling for breakup, an article discussing legal changes required to “take down big tech,” and another musing on what Amazon will do once its “domination is complete.”

That’s a lot of ink to spill on an issue that lacks either public or scholarly support. Polls show that the public has little interest in breaking up companies that either employ them, or sell them products at low or zero prices. And although I have decried Facebook’s treatment of app developers, to my knowledge no antitrust specialist has argued for the breakup of Google, Facebook, or Amazon. To the contrary, probably the two most prominent scholars in the field, Herbert Hovenkamp and Carl Shapiro, have urged caution. (Tim Wu, who has written on antitrust, but has much broader interests, has made the limited suggestion that Facebook should unwind its acquisitions of WhatsApp and Instagram.)

Grasping for Scholarly Support

The absence of scholarly support for antitrust action was highlighted by the oddest episode to date in the Times’ reporting on the tech giants. In 2017, the paper reported extensively on academic work by a law student that sought to make a legal case for antitrust action against Amazon. What surprised antitrust scholars about the publicity wasn’t just that the Times had bypassed experts in the field in favor of promoting student work, but that the work itself broke no new ground.

Firms violate the antitrust laws by taking steps to disadvantage rivals. But the student, Lina Khan, offered no evidence of such conduct. Her closest attempt—the argument that Amazon had run diapers.com out of business by charging very low diaper prices—fell flat because charging low prices is anticompetitive only if the prices charged are below cost. Otherwise, low prices are a sign of healthy competition. Khan offered no evidence of below-cost pricing.

By reporting this work, however, the paper created the impression that there is an antitrust case to be made against Amazon, one that the paper reinforced by publishing two Op-Eds by Khan and then a profile by David Streitfeld that went so far as to call her a “legal prodigy.”

Khan’s association with Barry Lynn, a journalist and head of the pro-breakup Open Markets Institute, for which Khan worked both before and after law school, highlights the close relationship between the Times’s reporting and writers’ grievances against the tech giants. Lynn has written to the Justice Department on behalf of organized writers calling for antitrust action against Amazon.

Creating the Impression of Crisis

Equally troubling is the paper’s reporting on the ongoing House investigation into big tech. The Times ran a front page story on the investigation under the headline “Antitrust Troubles Snowball for Tech Giants,” suggesting a groundswell of interest in antitrust action.

What the story did not disclose is that the Congressman leading the investigation, David Cicilline—whom the Times quoted extensively in that article—is a sponsor of legislation pushed by the News Media Alliance that would allow newspapers to cartelize for purposes of fighting Google and Facebook. Cicilline has, incidentally, hired Khan to help with the investigation.

Similarly, the Times recently gave front page coverage to a preliminary step by antitrust enforcers to consider an investigation into big tech, and suggested that a case would have merit. But the paper did not mention that the only major antitrust action brought by the Trump Administration to date was the politically-motivated, and failed, attempt to block AT&T’s acquisition of TimeWarner, owner of Trump rival CNN. Given the President’s animus toward Google, Facebook, and Amazon, the opening of an investigation tells little about whether a case would have merit.

The Giant that Didn’t Bark

Further suggestion that writers’ professional concerns are coloring their coverage of the tech giants comes from the conspicuous absence of Apple from the paper’s crosshairs. Under the standard measure of monopoly power, the ability profitably to raise price, Apple has far more power than Google, Facebook, or Amazon, earning twice what runner-up Google earned last year.

But it has been hard to find a critical word about Apple in the Times’s pages.

That may be because Apple has played the role of hero to a beleaguered trade. In 2009, as the Kindle was sowing panic among publishing executives, Steve Jobs entered into a cartel agreement with the major publishers to sell ebooks via iTunes at fixed prices several dollars above the prices Amazon insisted upon for the Kindle. The Justice Department frustrated these plans, however, suing to break up the cartel, and winning at trial against Apple.

Against this backdrop, other connections between the Times and advocates of breakup appear in a new light. Times writers have repeatedly appeared to cast Elizabeth Warren, who has called for breakup, as the Democratic frontrunner, even as she has lagged in the polls. And the Times endorsed Zephyr Teachout in her failed 2018 bid for New York Attorney General. Teachout, who made her name as a scholar of corruption, rather than antitrust, is, to my knowledge, the only current law scholar publicly to call for breakup of Google and Facebook.

I don’t think there is a writers’ conspiracy here. But just as you won’t hear a good word from a cabbie about Uber or Lyft—even if these companies have made life for the rest of us much easier—you won’t hear a good word from a writer about Google, Facebook, or Amazon. The difference is that when writers complain, America is forced to listen.