Responding to the “techlash” against giant digital platforms — Amazon, Apple, Facebook and Google — Congress is pondering major antitrust legislation for the first time in 45 years. Big Tech critics assert that the growth of these platforms is largely due to lax antitrust enforcement, which has also contributed to a more general market power problem in the United States. The Biden administration’s sweeping executive order on competition policy, along with the appointments of populist reformers Lina Khan at the Federal Trade Commission and Tim Wu at the White House, and the nomination of Jonathan Kanter at the Justice Department, reflect the administration’s view that excessive market power is a ubiquitous problem.

These reformers are promoting a dramatic shift from a regime that emphasizes economic analysis and the net impact of market organization on consumer welfare, which has been mainstream antitrust thinking for about four decades, to one that includes other objectives, including protection of competitors and workers and furthering a more equitable distribution of income and wealth.

At the same time, center-left antitrust specialists, many of whom have held senior positions in previous administrations, are advocating more aggressive enforcement of existing antitrust laws. In a brief prepared for the House Judiciary Committee’s recent investigation into competition in the digital economy, a number of these experts argued that “current antitrust doctrines are too limited to protect competition adequately, making it needlessly difficult to stop anticompetitive conduct in digital markets.” Further, they say, evidence that “the antitrust laws, as interpreted and enforced today, are inadequate … to deter growing market power in the U.S. economy” is so unambiguous that “any conclusion to the contrary reflects either an incomplete or incorrect understanding of economics.”

In contrast to the populists, these antitrust specialists generally support the current consumer welfare standard as the guiding principle for antitrust policy. But their recommendations are similar to those of the populists: more aggressive enforcement that would make it easier to block mergers (particularly acquisitions of potential competitors), prosecute exclusionary behavior including predatory pricing and prosecute single-firm monopolization cases.

I hope cooler heads prevail. As with any major policy change, an overhaul of antitrust should be based on evidence that a serious problem exists and that the benefits of reform would outweigh the costs. Moreover, I believe the evidence of inadequate enforcement is weak, and evidence that stricter enforcement would yield net benefits is nonexistent.

A Hard Look at Market Power

Antitrust critics’ market power claims rely heavily on indirect measures of market concentration in broadly defined industries — not from product or geographic markets that are far more relevant for competition analysis. A 2016 White House report, an early study that calculated increases in revenue shares for the 50 largest firms in broad industrial categories, illustrates this approach. The increases ranged from 11.4 percentage points in transportation and warehousing to 9.9 percentage points in finance and insurance to 3.1 percentage points in educational services.

Given that most concentration measures examine the market share of just the top three or four firms, it is difficult to argue that any analysis based on the top 50 could show a market problem because such large categories include firms that don’t compete with one another. For example, retail trade includes everything from clothing stores to supermarkets, across many geographic markets. In any event, the Herfindahl Hirschman Index (HHI), the concentration measure typically used by the enforcement agencies, is not high enough across industries to cause concern. For example, the HHI scores for Manufacturing and Utilities and Transportation is between 800 and 900, which would be the value for an industry consisting of 11 to 12.5 equally sized firms.

Moreover, local geographic markets, which are more relevant to consumers, have in many cases become less concentrated even as national markets have become more concentrated. For example, the asset shares of the top five banks in the United States have risen substantially since 2000, while the HHIs for bank deposits in local areas have been flat or falling. This can happen when a national chain expands into more local markets.

Some analysts have pointed to studies showing evidence of market power in better defined markets. However, some of the largest increases in measured market power appear to be in more highly regulated industries (e.g., finance, health care and utilities), which might suggest that government is a cause rather than a solution. Regulation, after all, often erects barriers to entry and entrenches incumbents.

Even if concentration has increased, however, the implications are unclear. Economists ranging from conservative (Harold Demsetz) to liberal (David Autor) have explained that markets can become more concentrated as the more efficient firms — “superstar” firms — produce higher quality products and potentially lower prices, thereby gaining market share. A policy of discouraging the growth of more efficient firms would thus not be pro-consumer.

Critics cite high markups of prices over marginal costs, a classic test of market power. However, drawing inferences from markup data is also likely to be misleading, especially for industries with large amounts of intangible capital (intellectual property), high fixed costs and low marginal costs — such as large digital platforms and pharmaceutical companies. Such industries, among the most innovative in our economy, will necessarily be characterized by large markups if they are going to be able to cover total costs and be viable.

Moreover, the winners in “winner-take-all” or “winner-take-most” markets such as major tech platforms and pharmas will necessarily earn large profits on successful products because they must also cover the costs of numerous product failures. Assessing market performance requires also taking into account the probability of failure.

Some reform proponents, among them, Nancy Rose of MIT, argue that regardless of the evidence of market power, antitrust law has evolved in the federal courts under the influence of the “Chicago School” in a way that makes it too difficult to challenge mergers and other potentially exclusionary activities. This argument is reflected in the experts’ brief cited above and is the motivation for reform bills introduced in Congress this year.

What Is to Be Done?

A number of these bills would raise the hurdle for mergers, reflecting the popular narrative that merger enforcement has become lax. For example, a bill introduced by Sen. Amy Klobuchar would lower the standard for blocking a merger for all industries (not just Big Tech) and would, in many cases, shift the burden to the merging parties to show that the potential benefits outweigh the risks. In the House, a bill introduced by Hakeem Jeffries explicitly prohibits acquisitions of nascent or potential competitors by a “covered digital platform.” The bill does not define “nascent and potential competition” but does define competition to include anything that competes for the user’s attention.

Perhaps the most extreme proposal is the Ending Platform Monopolies Act, introduced by House Democrat Pramila Jayapal, which would bar large online platforms from using their platform to sell or provide products or services or owning businesses that create conflicts of interest. This proposal would prevent a company like Amazon from being both a retailer and a platform for other retailers. It would prohibit many acquisitions by Amazon, Apple and other large tech platforms, prevent them from growing organically and require them to break up their existing businesses.

It is difficult to see how consumers, who currently can access both Amazon and independent retailer offerings on the same platform (just as shoppers can purchase Safeway and independent brands in the same store), would benefit from being forced to go to separate platforms. The benefits of the prohibition for most independent firms that use the platform are also dubious, notwithstanding their complaints that Amazon abuses its position. Many small companies get their start and build their business by selling on Amazon. Similar arguments can be made about Apple’s App Store, which currently serves as a platform for apps supplied by Apple as well as by third-party developers.

Has Merger Review Become Lax?

The authors of these legislative proposals (and other critics) argue that merger enforcement has grown soft because the enforcement agencies overestimate the efficiency benefits of mergers and understate the potential anticompetitive effects. However, the data do not support the notions either that merger enforcement has become more permissive or that blocking more mergers would benefit consumers.

John Mayo and Jeffrey Macher of Georgetown University examined merger proposals submitted to Justice and the FTC between 1979 and 2017 and found that the likelihood of a merger challenge had more than doubled. Other things equal, a higher probability of a challenge should raise costs to the merging parties and increase the deterrent effect of merger enforcement.

Prominent antitrust economists differ in the lessons they draw from the merger retrospectives. Carl Shapiro of the University of California (Berkeley) observes:

While the overall body of evidence from merger retrospectives, standing alone, does not allow us to predict with confidence the effects of any given merger, it does indicate that merger enforcement has been too lax over the past 25 years.

On the other hand, University of Chicago economist Dennis Carlton and Ken Heyer, a former economist at both the FTC and the Justice Department, point out that

It does no good to tell a policymaker that 10 out of 100 potentially problematic mergers will lead to price increases while 90 are procompetitive unless one can somehow better identify the harmful ones at the time the merger is proposed. Otherwise, one would have to stop all 100 mergers if one wanted to prevent any merger-generated price increases.

The antitrust agencies currently have substantial flexibility to challenge mergers and to change their standards as the economic evidence warrants. The Congressional proposals would significantly raise the costs of mergers — both to acquirers and acquirees — and prevent some acquisitions outright regardless of the economic merits.

Showing that some mergers resulted in higher prices does not imply that shifting the burden of proof in merger reviews or establishing bright line rules that preclude acquisitions by large platforms regardless of their competitive effects would yield net benefits. More stringent enforcement might catch some anticompetitive mergers at the cost of blocking other efficiency-enhancing combinations. The challenge is to find the right balance.

When Are Acquisitions Anticompetitive?

Much of the current debate is focused on acquisitions by the large digital platforms. Facebook’s merger with Instagram in 2012 is a case in point. Critics argue that Instagram might have become a direct competitor to Facebook if the acquisition had been blocked, but it is impossible to know. 

John Yun of George Mason University points out that, following Facebook’s acquisition, Instagram grew from 30 million to well over 1 billion users, while Facebook grew from 900 million to over 2 billion users. Thus, even if Instagram had succeeded on its own, that would not necessarily mean that consumers would have been better off. The user data suggest that both platforms are extremely popular under the current ownership arrangement.

Reform advocates also express concern that tech giants, pharmaceutical companies and others stifle competition and innovation by engaging in “killer acquisitions” — that is, acquiring firms in order to eliminate potentially competing products and services. Yet, Oliver Latham and colleagues looked at acquisitions by Google, Amazon, Facebook and Apple between 2009 and 2013 and found that “only a small proportion of transactions could begin to fit the ‘killer’ narrative.” Colleen Cunningham and colleagues investigated this phenomenon with pharmaceutical companies and classified about 6 percent of the acquisitions in their sample as killer acquisitions — a modest number, surely.

Moreover, focusing on the potential anticompetitive effects of specific mergers misses a potentially more important effect — the adverse impact of making acquisitions more difficult on venture capital investment and the formation of startups. According to the Sand Hill Econometrics venture capital database, 42 percent of venture-funded startups fail, 12 percent go public and 46 percent are acquired. Acquisition is thus the major way investors can recover at least part of their investment and sometimes make a profit. This is particularly important in tech, including biotech, where a smaller firm may discover a product but the resources of a bigger company are needed to develop and market it.

Predation? What Predation? 

According to the critics, when large platforms set prices below costs (however measured), or even above costs but low enough to deter competitors, it keeps out entrants who might be more efficient and innovative. While it is possible, in principle, that aggressive pricing keeps out some innovative firms, it is obvious that, in practice, consumers do at least initially benefit from lower prices. Therefore, it is appropriate that modern economics-based antitrust has set a high hurdle for predatory pricing cases.

One of the pillars of current law is the “recoupment requirement,” which states that predatory pricing is rational only if a firm can gain sufficient market power to raise prices sufficiently to “recoup” the initial losses without drawing in new entrants. But in her well-known paper about Amazon, Lina Khan, the new chair of the FTC, supported “abandoning the recoupment requirement in cases of below-cost pricing by dominant platforms.” She bases this on a belief that predatory pricing becomes “highly rational” because investors reward growth over profits. 

However, this conclusion reflects a misunderstanding of what determines investment decisions. During its early years, Amazon attracted investors and its share price rose even though it was losing money, but there’s no good reason to believe that investors expected that to go on forever. Share prices reflect expectations of future profitability, and it can’t be the case that investors would continue funding a firm in the name of growth irrespective of future losses.

Amazon is well established and profitable now, but it was only started in 1994. For many firms, especially early-stage firms (which Amazon was until relatively recently) keeping prices low is an investment in attracting customers and gathering data — which can then be used to improve their products and attract more customers. There is no economic difference between this type of investment and other investments. The fact that such firms may operate at a loss for a period does not indicate anticompetitive behavior.

In theory, a firm might engage in what might be considered predatory pricing to attain a reputation for being aggressive in order discourage entry. In practice, however, it is difficult to establish a standard that distinguishes such predatory behavior from aggressive competition, which is plainly good for consumers.

A more activist predatory pricing policy thus runs the risk of evolving into price regulation, whereby enforcers explicitly or implicitly establish a price floor — but without a sound basis for doing so. The Klobuchar antitrust reform bill would make it considerably easier to prosecute predatory pricing (and other “exclusionary practices”) by defining exclusionary conduct as conduct that “materially disadvantages one or more actual or potential competitors.” The bill would establish a rebuttable presumption that a company engaging in such conduct creates an appreciable risk to competition if the company has market share greater than 50 percent or “otherwise has significant market power.”

Thus, a company that lowers price or improves quality — normally considered pro-competitive activities — could be guilty of an antitrust violation if it were sufficiently successful. Competitors’ interests would likely be placed above consumers’ interests, which in my view would be an unfortunate departure from the longstanding U.S. approach.

Monopolization Cases

In 2013, after a two-year investigation of Google’s search practices, the FTC unanimously decided not to charge the company with unfairly giving preference to Google’s own content. The FTC concluded that “Google adopted the design changes that the Commission investigated to improve the quality of its search results, and that any negative impact on actual or potential competitors was incidental to that purpose.” Critics — such as Leah Nylen of Politico — argue that failing to bring a case was a mistake and that “Washington fumbled the future.” But they do not provide evidence that pursuing the Google case would have benefited competition or consumers.

Robert Crandall of the Technology Policy Institute reviewed the major Sherman Act Section 2 cases — and the remedies imposed — from Standard Oil to Microsoft. He found that the remediation was invariably overtaken by new technologies or other industry developments. For example, while the government sought to create more competition for desktop operating systems software in the Microsoft case, 15 years later Microsoft maintained an 80 percent market share. The overall operating system market, as well as the related browser market, eventually became much more competitive — but only after the widespread adoption of mobile computing, which had little or nothing to do with the Microsoft case.

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All told, it’s hard not to conclude that the paucity of evidence of the benefits of reforms combined with the absence of a demonstrable market power problem should give pause to calls for new antitrust legislation or for ratcheting up enforcement. As Congress considers policies that represent a sharp break with the status quo, the burden should be on those who believe reform is necessary — more specifically, that the benefits would outweigh the costs.