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Yes, “complexify” is an actual word; it’s the opposite of “simplify.”
Current discussions of US antitrust policy often refer to a “before” and an “after.” A common fable goes that in the “before” from the 1930s up through the early 1970s or so, zealous antitrust regulators protected the public interest. But then, a group of recalcitrant free-market academics led a movement to toss out the wisdom of the past, and instead allowed big business to flourish unfettered and unafraid. Now, a brave but embattled group of reformers is struggling to reestablish the old wisdom of protecting consumers from big firms.
However, this fable is oversimplified to the point of deceptiveness. Brian R. Cheffins seeks to complexify the simple before-and-after narrative of how US antitrust enforcement has evolved in “Getting Antitrust and History in Tune” (Accounting, Economics, and Law: A Convivium, published online March 2, 2022, forthcoming in a print edition someday).
An earlier, shorter version of the Cheffins essay appeared in the Winter 2021 Business History Review. I wrote about that version last February, and there’s no need to repeat those points here. Here, I’ll just emphasize that both in the “before” and “after” period, and up to the present day, the issues of how to deal with large dominant firms and assuring that consumers will benefit from competitive market are typically more complex than “nuke ’em from orbit until the rubble bounces.” That certainly wasn’t the common policy during the “before” period up to the 1970s, and it’s unlikely to be a useful answer to the dominant digital firms of today.
Even at a quick glimpse, thinking of the “before” period as one where the antitrust authorities fearlessly confronted and broke up dominant firms was clearly untrue. If one looks back to the Fortune 500 list of largest companies in, say, 1960, you find the US auto industry dominated by General Motors (#1 overall on the list), Ford (#3) and Chrysler (#9). The US steel industry is dominated by US Steel (#5) and Bethlehem Steel (#13). The US oil industry was dominated by Exxon (#2), Mobil (#6), Gulf Oil (#7), and Texaco (#8). Government-regulated AT&T (#11) provided nationwide monopoly phone service. General Electric (#4) dominated in a swath of industries including appliances, engines, and turbines, while DuPont (#12) dominated in chemicals.
Such examples could easily be multiplied, as some social critics pointed out. As one prominent example, John Kenneth Galbraith published a best-seller called The New Industrial State in 1967, which basically argued that the United was no longer a free market economy, but instead had become dominated by large corporations who used advertising to determine consumer demand. Clearly, antitrust actions during this era were not preventing huge and dominant firms. Indeed, many people today now look back on those large companies–the well-paid jobs they provided, the products they produced at that time, and the global technological leadership they represented–as an American success story of that period.
The primary critique of antitrust authorities of that time was not that they were too aggressive with large firms, but that they combined being often too cozy with large regulated firms, helping those firms to avoid new entrants and keep prices high and while being weirdly interventionist with small mergers: for example, the 1966 Supreme Court case of United States v. Von’s Grocery Co. (384 U.S. 270) held that antitrust authorities could block a merger between two US grocery store chains that, combined, would have had 7.5% of the Los Angeles grocery market on the grounds that if there were many additional mergers between many other grocery store chains, the end result of this process of many hypothetical mergers would be anticompetitive. Indeed, in the late 1930s a number of states passed tax legislation that would have had the effect of making any chain grocery stores uncompetitive, and parallel legislation was introduced in the House of Representatives. A common view of the time was that the role of antitrust was not to assure that consumers received the benefits of competition, but that in certain industries traditionally dominated by small and less-efficient producers, the existing firms deserved legal protection from entry by larger and more-efficient producers.
In the modern economy, perhaps the most publicized antitrust issues involve dominant digital technologies. It’s not obvious to me that these should be the main antitrust issues: for example, the lack of competition in provision of home internet service, or the lack of competition in smartphone platforms outside the Android/Apple duopoly seem potentially more important. But big companies (deservedly) attract big attention, and there has been a wave of essays in the last few years about how or whether antitrust authorities should be confronting these firms (for some previous posts, see here, here, and here). Luigi Zingales offers a nice overview of the central tradeoffs and issues in “Regulating big tech” (December 2022, Bank for International Settlements, Working paper #1063).
Zingales emphasizes that the dominant digital tech companies display strong economies of scale and scope. These arise because once a firm has dealt with the high entry costs of becoming established in the digital world, and made the investments both in physical capital as well as in intangible capital from software to brand names and the support structures behind them, then serving some additional customers has a near-zero cost. Moreover, these firms often have network effects–that is, a major reason for new users to sign up with the existing firm is that previous users have already signed up. As a result, large digital firms can often provide services at lower cost than new entrants (“economies of scale”), can often expand this range of services relatively cheaply (“economies of scope”), and are protected from new entrants by the size of their existing operation (“network effects).
It’s certainly not impossible for new entrants to come along with a different approach to gaining digital customers, or for dominant firms to make strategic errors that make them unattractive to enough of the existing base that it opens the door for new entrants. But still, new entry may be hard. And when you add the issues involved with collecting and reselling user information, the potential for such firms to take advantage of their entrenched position becomes a real one. As Zingales writes:
Given these characteristics, digital markets are prone to become highly concentrated. With sufficient heterogeneity in preferences (e.g. teenagers prefer not to be on the same social network as their parents), the resulting market structure is an oligopoly, not necessarily a monopoly. In the presence of this tipping tendency, the competitive process shifts from competition in the market to competition for the market. In that case, consumers may only benefit from competition among several firms for the relatively short time period in which the firms compete to be the ultimate winner of very large economic profits.
Not only do consumers only benefit from competition for a very short period of time, the nature of that competition is often very different from the standard one and ends up hurting consumers rather than benefitting them. The assumption that competition is beneficial to consumers obtains in a setting where competition takes the form of products of similar quality offered at lower prices or products offered at the same price but with higher quality. In markets prone to tipping, however, firms have powerful incentive to disadvantage a competitor, because the positive feedback loop described above can turn a small temporary advantage into a large and permanent one.
Zingales emphasizes that all of this has global and geopolitical dimensions. Governments would like to have “national champion” digital firms, rather than relying on a provider from another country. Governments also focus on issues of data control: say, over data on financial transactions, or data that might influence public opinion about the government and its actions.
What might be done? Zingales, like all serious observers of this subject, emphasizes that the economic issues like economies of scale and scope, along with network effects, are real issues and provide real benefits to consumers. If consumers lived in a world with, say, 100 different versions of Amazon or Facebook or Google or Apple, these mini-versions of the existing firms would find it much more costly to provide the same services, much harder to expand the range of services they offer, and users would potentially suffer a loss of network effects. For these reasons, the simplistic “break ’em all up” logic is not applicable here. Instead, Zingales sketches a different direction for the antitrust authorities–based on “interoperability” and more data-sharing.
To understand the idea of interoperability, consider the situation of someone using their smartphone to get a ride. The person might click on a cab company, or Uber, or Lyft, or some other option. The individual companies all operate separate portals. But antitrust authorities could require interoperability: that is, if you click on “Need a ride?” then you automatically see all the immediate options from any provider. You can then click on whatever one you prefer–the point is just that you get to see all of them. One can imagine similar rules about ease of posting to different social media sites.
For the idea of additional data-sharing, the key tradeoff is that there are positive and negative externalities from data-sharing. For example, sharing information about traffic flows can help minimize traffic jams; sharing information about web searches can provide quick information about whether a virus is spreading in a local area; and sharing genetic information can even help cure diseases. On the other side, sharing information can involve loss of individual privacy, as well as potential costs of misinformation. Different people and countries may weigh these tradeoffs very differently: for example, in Norway all individual tax returns are public information–an idea that seems quite unpopular in other countries. Zingales suggests that we explore methods of making data on broad groups as broadly and publicly available as possible–after taking strong steps to protect individual privacy. His notion is that this step would remove the benefits to a dominant digital firm from hoarding data, and would also encourage the entry of new firms with innovative ways to use the data.
The ideas about interoperability and data-sharing are only lightly sketched in this paper, and I put them forward more in a spirit of discussion than as hard-and-fact policy recommendations. But these kinds of ideas offer a starting-point for getting beyond reflexive anti-bigness–and beyond myths about past antitrust approaches–and instead move us toward thinking about what rules might help to structure digital industries in ways that improve the benefits for consumers.
Timothy Taylor is an American economist. He is managing editor of the Journal of Economic Perspectives, a quarterly academic journal produced at Macalester College and published by the American Economic Association. Taylor received his Bachelor of Arts degree from Haverford College and a master's degree in economics from Stanford University. At Stanford, he was winner of the award for excellent teaching in a large class (more than 30 students) given by the Associated Students of Stanford University. At Minnesota, he was named a Distinguished Lecturer by the Department of Economics and voted Teacher of the Year by the master's degree students at the Hubert H. Humphrey Institute of Public Affairs. Taylor has been a guest speaker for groups of teachers of high school economics, visiting diplomats from eastern Europe, talk-radio shows, and community groups. From 1989 to 1997, Professor Taylor wrote an economics opinion column for the San Jose Mercury-News. He has published multiple lectures on economics through The Teaching Company. With Rudolph Penner and Isabel Sawhill, he is co-author of Updating America's Social Contract (2000), whose first chapter provided an early radical centrist perspective, "An Agenda for the Radical Middle". Taylor is also the author of The Instant Economist: Everything You Need to Know About How the Economy Works, published by the Penguin Group in 2012. The fourth edition of Taylor's Principles of Economics textbook was published by Textbook Media in 2017.
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