Competition Policy Challenges In Emerging Technology Industries

Antitrust laws established in a democratic republic serve one ultimate purpose: to promote citizens’ well-being. Given their loyalty to the U.S. Constitution, in which the free pursuit of happiness is enthroned, the public and private sectors and the civil society of the United States of America should understand the explicit goal of competition laws better. Economic freedom protection and competition preservation in marketplace, according to the U.S. Department of Justice, necessitate the emergence of antitrust laws.

But the DoJ’s ambiguous explanation diplomatically conceals the identity of those who are protected behind the antitrust laws. The DoJ makes a failing attempt to escape the antitrust binary of consumer protection and business support by blurring the laws’ intention. But the Justice Department has not been the only one who failed to articulate the purpose of antitrust laws since the early 20th century, when the antitrust movement in the United States entered the stage.

After previous administrative and judicial neglect and the establishment of the Sherman Antitrust Act in 1890, the forced breakdown of Standard Oil and the founding of the Federal Trade Commission took place to prevent the formation of monopolies. In the following decade, however, major antitrust events were rarely carried out, since administrations usually favored cooperation between industries and the government over antitrust enforcement. The devil in the eyes of Judge Brandeis and the antitrust laws at the time was clear: commercial giants like Standard Oil, whose market power and dominance were considered threatening to the healthy function of the industries.

But like the DoJ statement, the theory behind the administrations’ antitrust behaviors before 1930s did not specify for whom the antitrust defense should be carried out, but only against whom. Then it came the prime time of antitrust from 1940s through late 1970s, when competition in marketplace and its government-led preservation were canonized. Under the influence of the heated worldwide ideology tensions, “competition ideal” became the mantra, along with liberal democratic values, to redistribute previously concentrated economic and political power to provide the public with greater opportunities to win through competition. Heavily impacted by Friedrich Hayek’s advocacy of the competition ideal, antitrust actions at the time were thus recognized as the almighty defense power against fascism and authoritarianism.

Antitrust policy and enforcement have been declining since late 1970s with the ascent of the Chicago School of Economics. Antitrust laws’ non-economic goals were set aside for a broadly defined “consumer welfare.” The concern about market concentration in an industry and the need to mitigate the economic, political, and social harms caused by concentrated economic power were also ignored. Antitrust theories at the time also depended on a conception of competition differed from that prior to 1970s. Followers of the Chicago School’s assumptions of self-correcting markets and rational market participants, courts believed in market’s innate effectiveness, via which resources are distributed accordingly. Therefore, strong antitrust enforcement to create or maintain the competition ideal was not necessary.

According to the antitrust theory leaders at the time, market forces could automatically correct the economic ebbs and flows and could do so far better than government-led preservation. Neither competition nor consumer welfare was the goal of antitrust laws; instead, an untouched, almighty market was. The significance of antitrust laws to a modern republic should always be ultimately political and social, rather than exclusively economic, even though the U.S. antitrust history has not always adhered to this tenet. After all, antitrust action is a means taken by the government to respond to its publicly demanded responsibilities, including the promotion of citizens’ well-being. Competition or consumer welfare, however defined, is not the ultimate end of antitrust laws; instead, they only represent the approach to achieve broader government objectives for the economy or for a given industry.

Is it too demanding for antitrust laws, as if they should bear the burden of the republic’s health? I don’t think so, and we have to let competition policy do its magic to improve the allocation of scarce resources, reduce the costs of goods and services, and maximize overall wealth. The more pressing issue, however, is not whether antitrust laws are economically or politically oriented. Rather, it is how the regulators and lawmakers in the United States blend the laws’ multiple goals to create an effective and competitive process by improving efficiency and promoting economic freedom and fairness.

Combining these goals, lawmakers can expand the range of entrepreneurial opportunity seeking to satisfy any increasing consumer demand for choice. The U.S. economy relies on new businesses entering the market for productivity gains and job creation. Promoting economic freedom and opportunity and ensuring a level playing field for small and mid-sized enterprises will likely promote, rather than undermine, dynamic efficiency. In addition, promoting these blended goals can strengthen the network’s resilience.

One issue with the blended goal approach, however, is the incompatibility of antitrust laws’ multiple goals and the rule of reason, which is a legal doctrine applied to the Sherman Act interpretation. To be consistent with the rule of law, one cannot have a fact-specific weighing standard and multiple policy objectives at the same time. Making law-enforcement agencies and courts blend goals in every antitrust case is bound for conflictions, and it is extremely challenging for antitrust law enforcement and courts to consider multiple goals in a systematic manner. Thus, if the political and social goals of antitrust practices are acknowledged, the rule of reason can no longer be their dominant legal guidance for antitrust activities.

In fact, for antitrust law making in the United States, the pursuit of one economic goal is not going to succeed, since no legal consensus had ever reached on a well-defined goal. The pursuit did not and will not substantially improve antitrust consideration or push it closer to the rule of law principles. Therefore, it is the time to comprehensively reconsider antitrust laws’ political, social, economic, and even moral concerns. In re-calibrating the goals of competition as a means to secure political and economic freedom, antitrust actions can be more responsive to the public demands from the government. With a blended goal approach incorporated in better legal standards, competition laws will be more effective.

However, for the technology industry, a different set of legal practice with the same antitrust essence might fit it better. With the public well-being on its mind, the government should take a more laissez-faire approach to stimulate the greatest potential out from the lucrative yet rapidly changing industry. The evolution of the technology industry and its members has an inherently pro-competition pattern, even though from time to time market concentration naturally emerges within the pattern. Admittedly, the existence of network effects and scale economies has given the technology industry the tendency of concentration. Network effects, sometimes referred as network externalities or demand-side scale economies, are the value to a buyer when some other buyer also purchases the product or service.

For instance, a telephone has little value if it can be used to call only a handful of numbers, but great value if everyone is on the telephone network. Similarly, software programs for word processing or spreadsheets have greater value to a firm if its suppliers and customers use similar software and new employees need not be trained to use it. Expected to become dominant after it achieves a small advantage in early competition, a firm may find that a disproportional number of new buyers selecting its product thanks to network effects. Helped by the effects, the firm may quickly grow into the winner of the market under a standard-setting, free competition. Such competition is typically winner-take-most, or in more extreme cases, winner-take-all. Network effects, even though imposes no direct market intervention, are naturally anti-competition, since once they emerge in a market, it is more difficult for a rivalry to take place, even with more efficient competitors and their better products.

Social media platforms, clouding computing services, online marketplaces, and other services provided by modern tech giants have been benefiting from network effects. For instance, Facebook attracted over two billion monthly users in 2017 based on its one billion users acquired less than five years ago. Tech firms that benefit from strong network effects have a natural tendency, like the physical property of inertia, to see increasing market share. The tech firms that dominate the S&P 500 have also accumulated troves of data on their users, advertisers, and competitors. Data has in both theory and reality increasing returns to scale, and the firms with the most data will have more accurate pricing, search result, and advertising algorithms. The savage growth of the tech giants seems unable to be hindered. There is a theoretical way to topple a tech industry leader, and it requires a revolutionary product that “leapfrogs” the market leader’s technology.

But in fact, the natural concentration tendency of the tech industry caused by network effects does not even necessarily guarantee their dominance, and the industry actually preserves competition among industrial players in its distinctive manner. Within the recent decades of growing information technology firms, the incumbent advantages of large user bases and troves of data collected from them, which have been the exact antitrust concerns, have been poor predictors of the firms’ continued success. The failure of AOL Instant Messenger (AIM) serves an example of how a service with massive information and data accumulation and had benefited from network effects missed its possible dominance in the industry.

In the early 2000s, AIM had huge market share in the instant messaging realm. Critics of the potential monopoly of a merged AOL-Time Warner at the time argued that the new juggernaut would monopolize the instant messaging services market, because according to network effects, large platforms would only grow bigger. AOL-Time Warner later decided to make its instant messaging service interoperable so that consumers would not have to set up an AIM account to chat with other AIM users. AOL’s move theoretically gave up the company’s status of a beneficiary of network effects. Additionally, until the platform was interoperable, AOL-Time Warner was refrained from leveraging its broadband networks to introduce videoconferencing and other new features. The platform was never made interoperable, yet AIM’s market share shrank within only a few years.

Where did the network effects hypothesis that predicted AIM’s potential dominance go wrong? One explanation, which would be championed by the Chicago School of Economics, is that the network effects were strong, and the Federal Communications Commission’s later intervention and restrictions imposed on AOL-Time Warner simply undermined them. When the FCC put restrictions on AOL-Time Warner to check AIM’s growth, AIM’s market share declined due to the intervention. But if network effects are as strong determinants of AIM’s growth as the FCC believed them to be, AIM should have only continued to outpace the growth rates of its competitors until the interoperable platform was fulfilled.

AIM was the biggest player in the industry during the FCC merger review, so without interoperability, most new consumers should have been pulled into AIM instead of its competitors. Yet the story did not follow the assumption: Microsoft and Yahoo appeared to have been closing the gap with AIM since 2003. The issue with the network effects hypothesis, particularly for the AIM case, is that it assumes the costs of possessing multiple instant messaging accounts, social media accounts, and other online accounts alike, are extremely high. The inconvenience was recorded in the 2001 Merger Order of the FCC.

“Using several [instant messaging] services entails much inconvenience. A user must download several kinds of [instant messaging] software; must register and maintain accounts, unique names, and passwords with several [instant messaging] providers; must use each one enough to become comfortable with its ‘look and feel;’ must keep several buddy lists and remember which buddies are on which [instant messaging] service (and with what names); and must keep several IM sessions open simultaneously.” The FCC’s assumption is that consumers will choose only one instant messaging service, social media network, or search engine, and in that case, they rationally pick the most popular one.

However, consumers in the information technology marketplace are actually more willing to try new services and juggle among multiple similar (and of course, competing) services than the FCC expected. This ignored reality has contributed to the market share dynamics of the technology sector for two decades: AIM gave way to MSN, Yahoo Messenger gave way to Google Gchat, MySpace gave way to Facebook, SnapChat, WhatsApp, and Twitter, eBay gave way to Amazon, and Netscape gave way to Internet Explorer, and eventually, Google Chrome.

One fact that antitrust enforcers and lawmakers have to revisit is that the major tech companies nowadays succeeded through their hard fight against network effects. They started with no users, no customers, no retailers, and none of their data. But they still managed to get a decent market share while industrial leaders that had plenty of data and had benefited by network effects still had their dominance. These former startups came to overthrow the giants of their time, proving that market concentration of the industry in 2000 could not predict that after ten or twenty years. It will be unreasonable for regulators and lawmakers to continue presuming that network effects and big data will allow large tech firms to squash industrial competition or vanquish emerging threats via acquisition, after decades into the information technology revolution.

Historical approaches including simply breaking up the firms will only hurt the natural pattern of the competition-preserving tech industry and eventually citizens’ well-being. Moreover, if network effects are as strong as they have been claimed, the government-led breaking up of Facebook, Amazon, or Google will simply help start a new short-life competition towards a concentrated tech market. Rather than seeing the industry as a winner-take-all market filled with constantly hungry power players, we should believe that its natural flow will demonstrate its limited need of intervention or supervision and great potential to serve the republic’s public good.

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