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I’ve read that when a headline is in the form of a yes or no question, the answer is, “no.” That doesn’t hold true this time.
America’s leading technology companies are under attack from the US Department of Justice, Federal Trade Commission, the European Union (EU), and 48 US state attorneys general (AGs), and AGs from the District of Columbia and Puerto Rico. China’s competition regulator is even investigating Tencent.
Why is there a surge in antitrust cases against Big Tech? Did the companies suddenly lose their moral compasses? A closer look reveals that bad economics and politics are among the reasons.
Flaws in antitrust
Antitrust works under a flawed understanding of market power that is particularly problematic in tech.
As I explain in a recent paper, antitrust authorities go after a company at the pinnacle of its success because, well, surely there is a correlation between success and antitrust violations, right? Not in the case of tech.
When investigating a company, US regulators ask: Is the company making an abnormally high profit (“economic rent”)? Are its product prices above their production costs (“marginal cost”)? Do customers flee to other products or rivals if the company increases its price (“highly elastic demand”)? If the answers are “yes,” “yes,” and “no,” then US regulators conclude that the company has market power. Things are simpler in the EU: The regulator says the company has market power if it has at least 40 percent market share.
What’s wrong with these definitions? All successful tech firms satisfy them. And they always will. It’s simply a matter of economics. In the US, about 90 percent of tech startups fail, draining substantial investor cash.
Investors will continue to fund rivals only if there are prospects of very high profits down the road. And since costs are dominated by software and infrastructure, which do not vary with sales, production costs always appear to be far below prices. And the markets tend to tip, so stable market shares are rarely below 40 percent and there are no close rivals while the company is profitable.
What should regulators do? Take a more dynamic view of tech, including testing whether today’s profits are a financial drain on the sector, or are driving new investment. They should also study whether a firm has some endowment that gives it an advantage, such as regulations (including antitrust regulations) benefitting companies that align themselves with politicians in power. If the answers are “driving investment” and “no,” then there is no market power. But sometimes the answer to the last question is “yes.”
Flaws in politics and government
DoubleClick founder Kevin O’Connor tells a troubling story of a member of Congress effectively threatening the company with regulation if political campaign support was not forthcoming. That’s worse than abuse of market power. Was it an isolated incident? Are today’s investigations politically driven? The answers are “no” and “yes.”
Of course, antitrust investigations are politically driven. This is true by definition because everything government does descends from politics. So a more pertinent question is whether particular antitrust actions or regulations are designed to punish political rivals or benefit political friends.
Investors think regulation is ripe with political favoritism. In 2001, when Sen. James Jeffords (D-VT) switched from Republican to Democrat and tipped control of the US Senate, stock values of Republican-aligned firms went down and those of Democrat-aligned firms went up.
Stock values of companies rise when they appoint politically connected persons to their boards of directors. Government contracts tend to go to businesses that are connected to the political party in power. Stock values rise for companies when someone they are connected with is appointed to a regulatory agency that oversees them. This pattern is beyond simple ideology because stock values in general rise when Republicans win political offices.
What should regulators do? In addition to rethinking market power, antitrust authorities should investigate political barriers to competition. Of course, such an inquiry would be career-limiting for government employees, so research alliances with scholars would help. And since many scholars today tend to be politically aligned, research would need to draw from multiple viewpoints and highlight any biasing assumptions.
Antitrust enforcement works under a flawed understanding of market power, usually attacking companies at the pinnacle of their success. Regulators would do better to investigate political barriers to competition.
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