THE COLLEGE HILL INDEPENDENT


Making Cyber Space

Antitrust and Big Tech

by Bilal Memon

Illustration by Eliza Macneal

published October 4, 2019


Before he was the face of billionaire philanthropy, Bill Gates sat in the deposition chair of the United States District Court for the District of Columbia. The case, United States v. Microsoft Corp., concerned Microsoft’s illegal use of monopoly power. The Department of Justice argued that Microsoft was preventing PC manufacturers, who all used Microsoft’s operating system, from uninstalling Internet Explorer, a Microsoft product, in favor of other competing web browsers. Microsoft was attempting to leverage its dominance over the operating system market to shape and control the nascent internet ecosystem. The case was settled in 2001, and Microsoft agreed to substantial restrictions. Had Microsoft’s anticompetitive behavior gone unchecked, the internet would have grown up very differently: much less competitive and innovative. In the early days, the internet looked very much like the Wild West—fortunes made and lost in a single day, entrepreneurs constantly jockeying for position in the ever-changing hierarchy of power and popularity. As the binary-encoded dust has settled and the internet has entered its adolescence, a few established giants have emerged—Amazon, Google, and Facebook chief among them. These companies have used their power unfairly and to uncompetitive ends. It is time, once again, to regulate big tech in order to reestablish the competition that enabled the growth of these companies in the first place.

 

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Contemporary legal theorists and politicians need not imagine potential regulation from scratch. America has a rich history of antitrust law, which stretches back over a hundred years and intersects with some of the most transformative developments in twentieth-century American life. Understanding this history is crucial to understanding how we got to where we are and, more importantly, how to get out of it.

During much of the Gilded Age, a period of heightened inequality from the 1870s to about 1900, monopolies were not only tolerated but celebrated as examples of economic progress, efficiency, and to some, divine providence. As John D. Rockefeller, the founder of Standard Oil, put it, “Growth of a large business is merely a survival of the fittest … the working out of a law of nature, and a law of God.” An all-encompassing firm, run by great men and free from government intervention, was the antidote to the ruinous competition that many blamed for the spiraling prices and subsequent economic downturn of the 1890s. Big business, with its economies of scale, was the most efficient mode of production, they argued. But facts on the ground—rising inequality, poor working conditions, nonexistent consumer protections and increased prices—often betrayed a very different story: monopoly power allowed firms to exploit both workers and consumers with impunity.

In order to understand the populist backlash against monopolies, it is important to distinguish between two interrelated but distinct strands of criticism. First, there are arguments concerning the material welfare of all participants in the economy, though analysis usually focuses on consumer welfare in particular. For example, if a monopoly jacks up prices or prevents competition such that innovation is stifled, material welfare is negatively affected. Second, critics also argue that monopolies pose dangers to the more abstract and less quantifiable notions of liberty and democracy. In the US, such responses can trace their lineage to Louis Brandeis, the early twentiethcentury Supreme Court judge and critic of “excessive bigness.” Brandeis argued that decentralized marketplaces, which operate on a human scale, are more sensitive to the wants and needs of people as opposed to big business, which tends toward consumer and worker exploitation. Brandeis envisioned a democratic economy in which no one individual had disproportionate access to capital or production, and could thus autocratically dictate the rules of the marketplace. Brandeis also argued that, because the economy touches every aspect of social life, the concentration of economic power among a handful of CEOs broadly threatens individual liberty.

Concerns for both material welfare and liberty informed the populist discontent that grew in reaction to the abuses of monopoly power. Organized labor, the rural “Granger movement,” and even a short-lived Anti-Monopoly Party all contested the dominance of the laissez-faire policies that characterized the Gilded Age. The Sherman Antitrust Act of 1890 was one of the prime achievements of this coalition. The Act broadly prohibits both anticompetitive collusion between firms and unilateral attempts to monopolize a certain industry. The law was not guided by any particular doctrine, but is rather a synthesis of interrelated concerns: among them, the damaging effects of concentrated business power on democracy. The law’s namesake, Senator John Sherman of Ohio, proclaimed on the Senate floor that no problem “is more threatening than the inequality of condition, of wealth, and opportunity … [and that] if the concerted powers of this combination are entrusted to a single man, it is a kingly prerogative, inconsistent with our form of government.” Echoing Brandeis, Sherman understood that monopoly power not only affects economic prosperity, but also vitiates the spirit and character of the nation.

The Sherman Act was not enforced under the presidency of William McKinley, a staunch libertarian, whose campaign slogan, “Let well enough alone,” neatly summarized his economic agenda. It was not until McKinley’s assignation and the subsequent inauguration of his vice-president, Theodore Roosevelt, that the Sherman Act was applied with any seriousness. Upon hearing of Roosevelt’s inauguration, J. P. Morgan reportedly slumped into his armchair, exclaiming, “This is sad, sad, very sad news.” Morgan’s initial fears proved far more prescient than even he could have predicted. During his term, Roosevelt, nicknamed “the trust-buster,” brought 44 antitrust suits; broke up the Northern Securities Company, the largest railroad monopoly; and enacted harsh regulations on Standard Oil, which would be broken up after his presidency. With Roosevelt began a half century of aggressive antitrust enforcement focused on protecting competition in order to maintain fair market conditions. Through the 1960s, strong antitrust enforcement was seen as necessary for a functioning democracy.

 

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The 1970s marked an important turning point for antitrust thought. A group of legal scholars and economists associated with the University of Chicago formed the Chicago School, which championed laissez-faire policies and the self-correcting power of the market.  A subset of this group, primarily from the Law School, developed an approach to antitrust that pivoted concerns away from preserving competition and toward increasing consumer welfare, narrowly defined by short-term price analysis.

Before the influence of the Chicago School, antitrust analysis focused on market structure. Structuralists believe that because concentrated markets lead to anticompetitive behavior, the government should attempt to mitigate activity that would further concentrate markets in order to preserve competition. The Chicago School, on the other hand, cared little about structure or competition. In fact, Aaron Director, one of the leaders of the Chicago School, argued that a focus on preserving competition might protect less efficient companies from more efficient companies. Instead of structure, according to the prominent Chicago jurist and economist Richard Posner, “The proper lens for viewing antitrust problems is price theory.” The Chicago School maintained, contrary to even a cursory attention towards legislative intent, that consumer welfare, as measured by short-term price changes, was the only legitimate criteria through which to pursue antitrust enforcement; only price hikes, according to them, warranted antitrust scrutiny.

The effect of the Chicago argument is two-fold. First, the Chicago School immediately discarded any value placed on the role of antitrust in preserving liberty or democracy; these concepts hold no meaning in the Chicago mode of analysis. Second, they ignored long-term consumer effects or other material consequences that do not immediately materialize in price changes. For example, consolidated markets might increase the barrier of entry for new firms, stifle innovation, and hurt consumers, but such harms slip through the gaps of the Chicago School's argument.

Although the Chicago School initially stood on the fringes of legal thought, by the late 1970s and early ’80s, their view had become orthodox. Many prominent jurists were either members of the Chicago School themselves, such as Richard Posner, or students of the movement. The Supreme Court also began explicitly citing works by the Chicago School in decisions. Moreover, the emergence of the Chicago School paralleled the rise of neoconservatism more broadly. With the election of Ronald Reagan, members of the Chicago School had a sympathetic ear at the highest level of government.

 

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The dominance of the Chicago School explains the unregulated growth of big tech, the case against Microsoft being a notable exception. Considering the scope of internet companies, whose primary markets span from transportation to retail to data collection, it is impossible to categorically list the range of anti-competitive behavior, especially as the dynamics of such behavior are often market-specific. That said, two instances of anticompetitive behavior, by Amazon and Facebook, exemplify general trends in the industry.

Because it both owns a platform over which goods are sold and has vested interests in certain goods sold over that platform, Amazon holds an unfair advantage over its competitors. Amazon dominates US online retail, hosting almost half of all domestic e-commerce sales, seven and a half times more than its largest competitor, eBay. As a result, smaller merchants put their goods on Amazon in order to attract the largest number of potential buyers. As of 2017, there were 1.8 million sellers on Amazon Marketplace, the platform where third-party retailers can sell their goods. Marketplace allows Amazon to expand offerings and increase profits – sellers face fees up to 50% of their sale – without maintaining additional inventory or taking on substantial risk. Amazon then uses data from buying habits to compete with these third parties. If Amazon notices a product is particularly profitable, it will create its own version of the product. These Amazon-branded products have priority in customer search. Through substantial data analysis, Amazon purposely rigs the system in its favor. Such behavior reduces competition, hurts small producers, and increases the barriers of entry for future merchants—all of which substantially decrease consumer welfare in the long run.

Amazon’s dual business as marketplace-provider and producer is an example of vertical integration, a process in which multiple stages of production and/or distribution are combined. For the first half of the twentieth century, any attempt at vertical integration that substantially lessened competition was prevented. However, the Chicago School argued that vertical integration created efficiency that the government should support, not prevent. As vertical integration does not, strictly speaking, increase market share, the Chicago School was convinced that prices and output would remain unaffected. Reagan’s Department of Justice and the Federal Trade Commission, influenced by the Chicago School, issued new guidelines that narrowed the criteria for reviewing vertical integration. Reagan and the Chicago School failed to comprehend the extent to which businesses could leverage their dominance in one industry to reap unfair advantages in another industry. Amazon Marketplace is case in point.

Another form of anticompetitive behavior practiced by technology companies is the frequent acquisition of competitors. Facebook is a particularly notorious and deft culprit. As the story goes, Facebook was born in Mark Zuckerberg’s Harvard dorm room and went on to quickly become the dominant general use social media platform. In the early 2010s, Facebook began to face stiff competition from a new start-up, Instagram. Instagram quickly gained traction with a younger cohort, who Facebook faced difficulty attracting. Recognizing its precarity, Facebook bought Instagram for $1 billion in 2012, maintaining its control over the social media industry. Since then Facebook has purchased 75 other competitors, including WhatsApp, whose one and a half billion users have given Facebook a footing in highly-sought after international markets. Unregulated acquisitions allow companies like Facebook to balloon to unthinkable sizes that pose a threat to both the industry and society as a whole. Much as the Gilded Age was marked by the railroad trust, the Digital Age is defined by the tech trust.

One of the many social harms produced by Facebook’s size is the mismanagement of personal data and its distorting effects on the democratic process. With its exponential growth, Facebook has gained unprecedented levels of access to consumer data; simultaneously, Facebook has replaced traditional media outlets as major platform for both news and advertisements. The Facebook-Cambridge Analytica scandal, where the political consulting firm Cambridge Analytica harvested personal data of Facebook users without their consent and used it for political advertising, highlights the danger of Facebook’s monopoly power. Although it remains unclear the extent to which Cambridge Analytica influenced election outcomes, the scandal illustrates the potential risks of consolidating so much information in a single firm.

Like vertical integration, attempts at horizontal integration—the acquisition of competitors—were highly scrutinized throughout much of the twentieth century. However, such regulations slackened after the influence of the Chicago School. The Chicago School argued that competition or the threat of competition prevented dominant firms from abusing their power. If Facebook abuses privacy rights, new companies will emerge which offer consumers better privacy conditions, or so the argument goes. However, such approaches fail to account for the high barriers to entry for social media companies. Since the value of social media to a user depends on the number of users already on the platform, known as networking effects, it is difficult for new social networking companies to compete with the giants. In an  interview with the College Hill Independent, David Packman, an early-stage venture capitalist at Venrock, said, “As a venture investor, we invest in little to no companies who are going to compete directly with the internet giants.” As a result, market consolidation and monopoly abuses will continue unless the government protects competition by preventing acquisitions. If the social media industry were more competitive, not only would personal data be decentralized among a myriad of companies, but the competitive process the Chicago School imagined, in which companies lured consumers with better and better privacy conditions, would be allowed to unfold.

These instances of anticompetitive behavior are just two of many, but they illustrate important characteristics of monopolistic conduct in the internet age. Platform products, like Amazon, allow dominant players to dictate the rules of exchange while maintaining vested interests in the outcomes of the marketplace; tech companies re-entrench their power through exclusive control over consumer data; network effects create significant barriers to entry; and the stakes of continued monopolistic exercise are no lower than democracy itself. Too often, complex economics equations and stacks of case books distract our political and intellectual leaders. To prevent history from repeating itself, antitrust law must refocus its attention on the human cost of monopoly power.

 

BILAL MEMON ’22  is always the top hat in Monopoly..