The tech giants are a small group of really big firms, which provide digital services
to users.
Most people mean a handful of firms that are public facing, such as Facebook and Amazon,
Apple, Netflix, and Google. Abbreviated sometimes as the FAANGs.
These new platforms creates a lot of social welfare benefits for users, but at the same
time, we know, and we increasingly are made aware of the fact that those platforms come
with a cost for users.
I'm not one for government regulation and a lot of oversight and getting their hands
in there, but if these companies can't do it themselves, is that what it's going to
come to?
I think eventually it would, you're exactly right, if they can't do it themselves.
We don't quite know how to cope with these new demands, which we perceive are indeed
of the family of market failures, but on which, due to the emerging nature of the phenomenon,
we have very little knowledge and very little experience in regulation.
In March, you said we were maybe past the point where tech companies could regulate
themselves in terms of privacy. What should we do now?
I'm not a pro-regulation kind of person. I believe in the free market deeply. When the
free market doesn't produce a result that's great for society, you have to ask yourself,
what do we need to do? I think some level of government regulation is important to come
out of it.
The consumer welfare standard was implemented and incorporated into the antitrust analysis
and competition analysis in the 20th century.
Consumer welfare standard has now been with us since, let's say late 1970s, 40 years.
Some people say that it's too price-centric, it doesn't entitle antitrust enforcers to
go after non-price cases. Harm to innovation, harm to quality, harm to choice. The idea
here is that when corporations grow too large, they can wield excessive influence on public
policy through all sort of tactics, including capture and corruption.
The term populist antitrust, or more frequently, hipster antitrust, really just describes the
trendy commentary now of against the consumer welfare standard, evoking all of these other
values that should be taken into account, people say, when analyzing a merger or a business
practice by a company. It can be jobs, it can be income inequality, it could be an effect
on the environment.
The proponents of the antitrust counterrevolution are in favor of a standard that they call
the protection of competition, or the protection of the competitive process. Professor Tim
Wu from Columbia Law School talks about a minimum of four firms in every and any market
in the US economy, and once we reach a floor of four firms, no mergers should be allowed
in those industries.
The history of American antitrust laws goes back to the Industrial Revolution. With machines
expediting labor, businesses like Rockefeller Standard Oil and Carnegie Steel Company became
so large that they shut out any competition. They were called trusts back then, but today
we call them monopolies.
The first antitrust law was actually enacted in Canada in 1889, followed by the Sherman
Antitrust Act in the United States in 1890. The initial impetus, as the name suggests,
was the act against trusts. In 1914 Congress created the Federal Trade Commission and passed
both the Clayton Act and the Federal Trade Commission Act.
Under the administration of Teddy Roosevelt in 1901, trust busting, the breaking up of
monopolies by the government, became a household phrase.
Now, from that date onwards, enforcement is going to increase. We are going to see cases
against large trusts and big business organizations like the Standard Oil of Rockefeller, or Alcoa
in aluminum. We see more cases. Every and any form of concentration, including very
incipient, insignificant increments in market share are prohibited, per se. You cannot merge,
you cannot exclude a business competitor. It is the same prohibition for all business
transactions, regardless of their size, scale, and possible efficiency.
But in the 1970s, appeals court judge Robert Bork changed the approach to antitrust by
introducing economics, and shifting the focus from protecting citizens to consumer welfare.
Consumer welfare is any of the additional value that we derive from the product or service
that's above and beyond what we pay. Suppose a smartphone costs $200, and I choose to buy
that smartphone for $200. I must derive at least that amount of value from the smartphone
for me, the consumer, to be rational in choosing to purchase that phone. Everybody's different.
To me the smartphone may be worth $1,000 of value to me, and I paid $200, and so, hey,
I actually derived $800 of surplus.
Bork really starts to rock the boat with his book, and in previous papers, and says, "We
need to look further, because not all such mergers and anti-competitive types of business
behavior are inefficient."
You're always trying to ask the question, post merger, whether the merged firm will
be able to raise prices to consumers. By raising prices, it would mean that consumers might
be getting the same goods or services, but now all of a sudden they're paying more. Therefore,
just numerically, you can see they're deriving similar values, assuming they're deriving
similar values as they did before, but now they're paying more. Lower consumer surplus,
lower consumer welfare.
The consumer welfare standard is ordinarily associated with lower prices, but that is
by no means the full story. If I'm buying something, I might want a low price, I might
want good credit terms, I might want prompt delivery, I might want a higher or a lower
quality, depending on how long I'm going to use it, or what have you. All of those dimensions
are, runs along which firms compete.
If you think about Facebook, Facebook has a core market in which it is a monopoly to
social networks. Google has a core market, which is a monopoly. You could say online
advertisement or search engine. Netflix, same for video streamings.
On the other hand, that could be a perception. They're very successful because they offer
a good product, but that does not mean that they don't necessarily compete with others.
They all face substantial competition in one respect or another. For instance, Amazon,
which sells goods, has four percent of the retail sales market. That is far from a monopoly,
that is a highly competitive firm in a highly competitive industry.
Investments in R & D, which really are very important, the growth of these companies,
the growth in output, product launch, new products put to the market, all that does
not really denote or smell like monopoly.
Google, say, has a very, very high percentage of the search business, or traffic, if you
will, but of course their real market is for selling advertising. In that market they are
far from a monopoly.
Traditionally in economics you say a monopoly is a firm that has 100 percent share in the
market. Then a separate issue is what do you define this market to be? What do you define
the space? It is a complicated question that economists and lawyers have spent a lot of
time thinking about and studying.
That is what the antitrust agencies do. They're not putting on blinders and looking solely
at price. Price is often enough because it can tell you, this is not good for consumers,
or it can tell you, this is very good for consumers, do you see any downside on non-price
dimensions?
A lot of Roosevelt's trust busting, sometimes it's been overstated how much it really changed
the economic power relationship, but it certainly made people look to Washington to regulate
businesses.
We know from economic theory that in industries with high fixed costs, that is the cost of
building a fixed infrastructure, in such industries sometimes it is more efficient to have a smaller
number of firms than a large number of firms, because you end up basically replicating the
number of infrastructure by the number of firms. If we go too far in that idea of protecting
the competitive process, or in this idea of protecting the structure of competition in
itself, we risk losing a lot of efficiency. The optimal standard for antitrust and competition
policy is probably somewhere in the middle.
I think the primary antitrust activity around the world, with respect to these companies,
has really been in Europe rather than the US. The European competition agency has brought
cases against Google for favoring its own websites, such as Google shopping.
In that decision, the European Commission decided it was unfair from Google to preference
its own comparison shopping service at the expense of others. Google needed to leave
some space, some living space and living profit for other companies to operate on it's platform.
The European Commission, the EU's administrative body, has certainly been active in prosecuting
companies for allegedly abusing their dominance of European markets, especially in the area
of high tech. The EU has leveled fines of billions of dollars on firms like Google,
Microsoft, and Intel. We'll be testifying about competition law approaches to monopoly
and abuse of dominance in the US and at the European Union. We welcome each of you and
we thank you for your time.
Now, the CEO of Google, Sundar Pichai, defended his company, saying they do not manipulate
searches. From the moment he stepped foot on Capitol Hill he got bombarded with questions
about possible bias. It started in the hallway.
I don't think this antitrust division is inclined to do anything really, really adverse to the
big tech dominant players. They're looking at it to make sure there isn't anything exclusionary
or nefarious going on.