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Monopolies: Antitrust Law Protects Consumers, Not Competitors

October 16, 2012 |

The key question is whether a monopoly is harming consumers – or merely harming its competitors for the benefit of those consumers.

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As we gear up for the presidential debates tonight, it’s worth reflecting on the presidential debates from exactly one hundred years ago.

Because the key issue debated then was how to handle the industrial monopolies of 1912: companies like Standard Oil and the American Tobacco Company. The incumbent (Howard Taft) campaigned on breaking up the monopolies; the opposing party (Woodrow Wilson) campaigned on regulating competition to prevent monopolies from developing in the first place; and the third-party campaigner (Teddy Roosevelt) argued we should actually welcome monopolies while regulating their activities. Wilson won, and ended up signing two major antitrust laws to supplement the existing Sherman Act: the Clayton Act and FTC Act.

To this day, antitrust law is based on these three acts. Yet the industries they cover – and our relationships with the large companies in them – have changed a lot in the past century.

From search and books to online TV and operating systems, antitrust affects our daily digital lives in more ways than we think. Consider two antitrust cases that have just re-surfaced in mainstream consumer awareness: The FTC is preparing to sue Google over search. And three publishers reached a settlement regarding fixing prices for e-books, as many people learned from e-mails this weekend telling them about a credit coming their way.

Here’s what we often forget, though: regardless of the industry, antitrust law is meant to benefit consumers – not competitors.

Under current U.S. law, being a “monopoly” is not illegal; nor is trying to best one’s competitors through lower prices, better customer service, greater efficiency, or more rapid innovation. Consumers benefit when Apple disrupts the market with iPhones and iPads, even if this means RIM sells fewer BlackBerries or that Microsoft licenses fewer desktop operating systems. Antitrust law only springs into action against a monopoly when it destroys the ability of another company to enter the market and compete.

The key question, of course, is whether a particular monopoly is harming consumers – or merely harming its competitors for the benefit of those consumers.

The answer isn’t as simple as “big equals bad”, or “competitor harm equals consumer harm.” Instead, courts must rely on complex economic analysis to determine whether consumers, not just competitors, have suffered harm.

When New Industries Change Things

The problem is our analyses are based on industries such as oil, shoes, and cigarettes, which have very different economics than software and networked industries.

To this day, antitrust law is based on three acts from over a century ago.

The long explanation of how these markets differ involves economic jargon like direct and indirect network effects, platform competition, and Schumpeterian competition. The short explanation is that in software and many other online markets, even dominant firms face potential threats because of the low costs for competitors to enter those markets. Threats more easily emerge because of better or newer technologies leapfrogging older ones: social networks over search, mobile devices over desktop operating systems, digital bookstores over brick-and-mortar ones.

Now compare this to the underlying economic features of industries other than software. With wireless infrastructure (consider the AT&T/T-Mobile merger), new competitors have extremely high entry costs: erecting towers, digging ditches, and spending millions on scarce government rights to spectrum frequencies. With online television, the Comcast/NBC merger raised genuine antitrust concerns because of the economics of both wires and content: Competitors like Netflix, Amazon Prime, and Apple iTunes need access to broadband customers (e.g., through Comcast’s cable lines) and premium content (e.g., through NBC and the cable channels it owns such as Bravo, USA, and MSNBC). Given the expensive economic and legal barriers to entry, there’s little chance of rapid disruption through new algorithms, user interfaces, or software systems alone.

When Consumers Like the Big Companies

The different economics for software and online industries may explain why big companies today are much more popular than those of a century ago. According to classic economic theory, big companies dominating a market provide worse service for higher prices.

The key question is whether a monopoly is harming consumers – or merely harming its competitors for the benefit of those consumers.

But in today’s fast-changing industries, even the dominant companies must stay on their toes – fending off competitors in ways that ultimately benefit consumers. When Twitter took off with its 140-character updates, Facebook created a similar UI and activity feed. When Google launched Google Plus with “circles” for different groups of friends, Facebook provided more options to categorize friends and acquaintances. The competition made us like and use Facebook more, not less.

Americans love their favorite technologies, and so they love – almost to the point of identifying with – the big companies that produce them. Even over smaller, underdog competitors that nip at their heels … and over other large companies competing with them.

Take Apple, the biggest company in the world as measured by market cap. Recently, a legal brief defending Apple went viral – perhaps the world’s first to do so. Now, it may have been because the brief was in comic-book form. But it also may have been because the brief defended Apple even though it was accused of engaging in a seemingly anti-competitive action: price fixing with a group of publishers and raising the prices of digital books.

The comic-brief’s author, and many others filing in the case, vigorously defended Apple and the publishers for raising consumer prices, claiming that the group aimed to counteract alleged anti-competitive pricing by Amazon. They argued that Amazon sells digital books for its Kindle below its own costs, destroying competitors such as independent physical bookstores and other digital retailers – so the Apple-led agreement to raise prices would actually benefit competition. Antitrust law makes exceptions where actions are “pro-competitive.”

When Competitors Think Google Does Evil … But Consumers Don’t

Now let’s examine the most recent high-profile antitrust inquiry: Google. The FTC is investigating Google based on accusations from an alliance of companies calling itself FairSearch.

Americans love their favorite technologies, and so they love the companies that produce them.

The FairSearch companies – Expedia, Hotwire, Kayak, and Microsoft Bing – argue Google abuses its dominance in search and online advertising to stifle competition. (Other companies actively encouraging the Google investigation include Yelp, as well as the product-search sites Foundem and Nextag.) But Google’s defenders claim its diversity of products and ability to innovate in travel search would indeed benefit consumers.

And therein lies the heart of the matter. Do consumers benefit from Google’s practices?

What do the consumers want? Polls are split. A survey paid for by FairSearch found that consumers want the investigation to continue; another survey paid for by the National Taxpayers Union found a majority of Americans are skeptical of government intervention and are happy with their choices. In practice, however, it seems consumers prefer Google to some of the complaining competitors – a preference suggesting that (at least some of) Google’s actions do benefit consumers.

Otherwise, consumers would click away to a competitor.

All of this isn’t to say that antitrust law be reduced to a simple matter of consumer preference. As mentioned earlier, there are complex economic factors at play. Nor am I arguing that antitrust is dead or has no role to play in the digital age. Some big companies can and do engage in behaviors that change the economics or make it impossible for competitors to keep them honest.

But when a company appears dominant in a particular segment at a particular moment, government agencies might want to think twice before bringing actions urged by unhappy competitors rather than unhappy consumers.

Disclosure: My law firm and I do work for Google and a few other technology companies. These are my own views and do not represent those of my firm or our clients.