Big is not necessarily bad

Big is not necessarily bad
© Getty Images

On July 29, 2020, the chief executive officers of some of the world’s largest technology companies, Alphabet, Amazon, Apple and Facebook, faced intensive questioning by the House Judiciary Committee. Antitrust-driven scrutiny of market leaders is not without precedent. Contrary to the protectionist “national champion” policies often pursued elsewhere, U.S. policymakers have a mostly laudable penchant for scrutinizing incumbents for efforts to entrench their success by erecting barriers against challengers. This was the fate of IBM, which endured a decade-long investigation and trial (with inconclusive results), AT&T, which experienced a similar process resulting in its breakup, and Microsoft, which was compelled to open up distribution pathways to consumers.  

It is now the turn of “Big Tech” to face examination in the court of antitrust. 

This is as much a court of public opinion in which outcomes can be determined on the basis of perceptions as it is a court of law in which outcomes are (hopefully) determined on the basis of law and fact. Currently there appears to be significant bipartisan support for leveraging antitrust law to restrain leading platforms in the digital ecosystem. Some policymakers and commentators have called for deploying antitrust law’s most dramatic remedies, including dissolution or other actions that would effectively convert significant functions of these platforms into public utilities.

ADVERTISEMENT

Antitrust law does not take lightly such far-reaching interventions, and any court would insist that the government supply compelling evidence that these companies have engaged in practices that result in a net harm to competition. 

Most fundamentally, it is important to remember (as now often seems to be forgotten) that mere size is never an offense under the antitrust laws. This principle is elementary but deserves to be restated. Decades of federal case law and regulatory guidance provide that a firm can only be liable for monopolization if — and only if — it acquires or preserves its market position through means other than “competition on the merits.” This critical qualification implies that antitrust law provides no basis for breaking up a firm or imposing any other remedy merely because that firm has secured an “excessive” share of the relevant market. Winners who play fair do not get punished simply for winning. 

Counterintuitively, antitrust law’s refusal to reengineer marketplace outcomes merely on the basis of firm size can operate to consumers’ advantage. 

Consider the fact that a small number of firms enjoy large market shares in significant segments of the digital economy. This top-heavy market structure is neither accidental nor nefarious. High concentration arises from the fact that competition drives firms to spread “fixed costs” — developing a new operating system — over the largest possible number of units. When fixed costs are high and “variable” costs — delivering one more copy of the operating system — are low, the most efficient firms naturally capture the bulk of the market. So long as actual or potential competition persists, consumers will enjoy part of the cost-savings through lower prices, and incumbents will invest in continuously improved products and services.  

It will be reasonably objected that leading platforms are shielded by network effects that neutralize entry threats and enable the platform to extract a significant premium in the digital ecosystem. This familiar line of argument must overcome two obstacles.  

ADVERTISEMENT

First, technology history shows that dominant firms have typically remained exposed to entry threats. The list of fallen giants is long: IBM (personal computers), Blackberry (smartphones), AOL (internet service and email), Yahoo! (internet search), eBay (online resale), and others. These technology leaders once seemed almost unbeatable. It is therefore necessary to show why currently dominant platforms would be exceptions to this rule.

Second, the premium enjoyed by leading platforms is not necessarily a source of concern. If firms cannot enjoy significant upside from prevailing in an innovation race, there would be little incentive to enter those races in the first place. Simply dismissing profits as “profiteering” overlooks the fact that it is the prospect of outsized rewards that induces entrepreneurs to undertake high-risk, high-return innovations that deliver the greatest social value over the long term. 

To be clear, these considerations do not foreclose the possibility that leading technology platforms engage in certain practices that impede entry without offsetting efficiency gains or impose harms that demand legal intervention outside antitrust. In particular, it is generally overlooked that large technology firms’ widespread opposition to robust intellectual property rights tilts the playing field against innovators that rely on those rights to capture returns on their R&D investments. But that is principally a matter for intellectual property, not antitrust, law. 

Distinguishing competitive from anti-competitive practices is uncertain and inherently fraught with the risks of false positives and false negatives. Yet what is certain is that this exercise must never indict a business practice solely because its practitioner has secured a large market share. This is especially the case in platform markets, where vigorous competition will necessarily yield a handful of big winners.

A “big is bad” approach that overlooks these complexities will soon be driven by ideology, populism and competitors’ private interests, rather than the fact-driven examination that best protects the public’s interest in an efficient and innovative marketplace.

Jonathan M. Barnett is the Torrey H. Webb Professor of Law at the Gould School of Law, University of Southern California.