#11 - Big Tech's Anti'trust' Issues
A comprehensive report on understanding antitrust policy and possible solutions to regulate the Big Tech companies
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Hello,
Welcome to another edition of The Curious Cat.
This week we focus on alternatives to regulate the power held by Big Tech companies (Google, Apple, Facebook, Amazon). The Big Tech companies have gained extraordinary power in our daily lives by offering most of their services for free. A massive centralization of power has led to concentration of wealth in the hands of few and increased the gap between the rich and the poor. Many people also fear that Google, Amazon and Facebook hold power not only over commerce but also over politics, news and our private information.
This situation raises few questions: can we create equal wealth creation opportunities for all aspiring entrepreneurs in markets and economies dominated by monopolists? Is there too much concentrated private power with too much influence and no regulatory oversight on our lives?
We try to understand this issue in a deeper manner by understanding the concept of antitrust policy and exploring feasible alternatives.
Photo : Amazon Antitrust by On the Media. Cartoon from the Library of Congress licensed under Creative Commons Attribution-Share Alike 4.0 International
In today’s edition we broadly cover -
What is Antitrust?
Allegations against Big Tech
Regulating Technology
Why Breaking Big Tech Is Not A Solution
Antitrust in the Indian context
Solutions
This is a long edition packed with various perspectives on antitrust policy and solutions. Pour a large cup of your favorite coffee and let’s dive in.
What is Antitrust?
Read the article here
Antitrust laws are regulations that monitor the distribution of economic power in business, making sure that healthy competition is allowed to flourish and economies can grow. Examples of illegal practices are price-fixing conspiracies, corporate mergers that are likely to cut back the competitive fervor of certain markets, and predatory acts designed to gain or hold on to monopoly power.
The Sherman Act, the Federal Trade Commission Act, and the Clayton Act are the key laws that set the groundwork for antitrust regulation in USA. The antitrust laws describe unlawful mergers and business practices in general terms, leaving courts to decide which ones are illegal based on facts of each case.
A Case For Not Regulating Big Tech
Read the article here
Free market advocates are against all kinds of government intervention and regulation. Their argument is that competition, rather than regulation is a better method of tackling potential monopolies.
John Thornhill writes that the rate of competitive churn in the technology industry has been pretty high - only four of the top 10 most valuable public companies in the world in 2010 are on that list today. However he does pose two questions to regulators-
How competition works inside these companies’ ecosystems, such as Apple’s App Store and Amazon Marketplace ?
To what extent has the very operation of the market been reconfigured by Big Tech’s data flows ?
We need to ask what specific harm we are trying to remedy and how regulators can ensure they do not inadvertently increase compliance costs. Intervention may yet be justified in several domains. But until those two questions can be clearly answered, it may indeed be better to do nothing.
Allegations against Big Tech
A summary of major allegations against the Big Tech quartet are outlined below -
Predatory Pricing - This accusation is primarily targeted towards Amazon. Online commerce enables Amazon to hike prices in at least two ways: rapid, constant price fluctuations and personalized pricing. Constant price fluctuations diminish our ability to discern pricing trends. Amazon is also able to tailor prices to individual consumers based on their shopping trends, known as first-degree price discrimination. However, it is important to note that practices such as constant price fluctuation and price discrimination are not unique to Amazon; other retailers undertake these practices as well. But not everyone has the data churning capacity that lies with Amazon
Anti-competitive behavior - Google has been accused of favoring its own content over competitors in its search results. It was fined €2.42 billion by European Commission in 2017 for manipulating the search result. Apple has been held responsible for favoring its own apps over competitor apps. Critics argue Apple manipulates the results to incentivize third-party developers to advertise the apps for keyword searches. There are also some controversies regarding 30% fee which critics consider as “tax” paid to Apple. Spotify, the competitor music app, filed an antitrust complaint against Apple on this 30% “tax”. Amazon has attracted a giant share of controversy on anti-competitive behavior. Critics point out the conflict of interest in selling third party products and offering Amazon’s own brands at the same time considering that unlike other retailers, Amazon has huge access to personal data to nudge customers to buy their products and limitless shelves.
Obstruction of competition through acquisitions - Almost all Big Tech companies have gone on a shopping spree to acquire startups and thwart any potential threat or competition. They present extremely high profit margins and no new relevant entry which is a sign of significant barrier to entry A key question that arises due to this acquisition driven growth strategy is the brakes applied on innovation and creating disincentives for entrepreneurs to start companies.
When Free is Bad - Big Tech defend themselves by saying that, since most consumers do not pay for their services, they cannot be hurt. Consumers pay in kind, by transferring their data. Market power manifests itself through lower quality, lower privacy protection, less creation of new business/entry, less variety of political viewpoints, and less investments in innovation.
Other concerns - Conservatives primarily accuse Facebook and Google (or most of Silicon Valley) of having political bias against conservatives. Facebook has found itself in controversies of misinformation and fake news. Privacy and data security remain concerns in many of these companies which have escaped scrutiny. All the companies have extremely concentrated market share in their respective areas of operation which makes them prone to misusing their position of power. Big Tech companies refuse to provide independent researchers with the data necessary to understand whether their behavior is indeed harmful. It is paradoxical that companies refuse access to the data necessary for in-depth, independent studies and then use the lack of in-depth, independent studies as evidence of lack of harm.
If there is so much smoke, does it mean there is a high probability of fire ?
Regulating Technology
Read the article here
Benedict Evans writes that when something is systemically important to society and has systemically important problems, it brings attention from governments and regulators. All industries are subject to general legislation, but some also have industry-specific legislation. Each industry has lots of different issues, in different places, with different people in positions to do something and different kinds of solution.
Part of the appeal of applying antitrust to any problem connected to ‘tech’ is that it sounds simple - it’s a way to avoid engaging with the complexity of real policy - but it’s also worth noting that the rise of tech to systemic importance has coincided with the second half of an industry cycle. The more one thinks about real policy, though, the more one sees that many of the most important debates we have around technology have deeply embedded trade-offs.
The characteristics of technology like network effects are global which allow adoption across geographical boundaries. Every country’s government has a right to say what can happen in that country. The same variance applies to privacy, competition itself and whole bunch of other issues, right down to very micro issues like whether an Uber driver is legally an employee or Airbnb’s impact on house prices. Even the basic mechanisms of regulation themselves can look very different in different places. This can lead to divergence on regulatory policy. Regulations will result in complexity and stifle innovation in the long run. That is a key consequence of regulation.
Antitrust Regulation - Does Big Tech Care?
Read the article here
According to Mark McCareins, there is little evidence that the firms ran afoul of antitrust regulation, as currently understood and applied. Antitrust regulation has historically been aimed at ensuring that consumers, not particular businesses, are not harmed by a lack of competition. And because search engines, social media platforms, app stores, and online marketplaces offer many valuable services to consumers for free, this complicates any arguments that consumers are being harmed, even if other businesses and industries are experiencing disruption.
The author further argues that the flux and churn in the tech sector, lack of feasible penalties and increased focus in antitrust compliance by Big Tech are strong reasons to quell any possible action against the Big Tech companies.
Does antitrust regulation remain relevant to the current context?
Antitrust regulation needs better tools to assess new forms of market power, assess macroeconomic conditions arising out of technological behemoths, and consider the link between technology and politics seriously.
Factors That Can Shape Big Tech Regulation
Read the article here
Vasant Dhar uses the financial industry as a benchmark to consider the factors that can shape the regulation in Big Tech.
A few central tenets include:-
The operator of a marketplace cannot selectively reward or punish its participants at will or steal their intellectual property (IP). Just like financial institutions must know their customers (KYC) to demonstrate that their actions are in the best interests of their customers, Big Tech should also have a verification mechanism.
The uniqueness of Big Tech is the inherent tendency of digital platforms towards “winner take all” outcomes, which leads to monopolies and their ability for “cross industry disruption” due to the economies of scope they create. In effect, the Big Tech platforms have tremendous market power to enter entirely new industries like transportation and finance, while potentially eliminating banks, auto manufacturers and even transportation service providers.
Given the inherent monopolistic nature of digital platforms, it makes sense to consider what parts of such platforms might be considered as “digital utilities” that are regulated accordingly to promote equal access to these commodity services and encourage innovation.
Will the CEOs who have built these large companies agree to operate as a not for profit government regulated utility?
Apart from the above mentioned advantages of strong network effects and strong economies of scale and scope, digital platforms of Big Tech also tend to demonstrate disproportional payoffs due to the use of data, low distribution costs that allow rapid global scaling, and marginal cost of servicing a new customer due to the scale.
If you have made it this far and find this topic interesting, you would like to share it with your friends and colleagues.
The next half of the newsletter deals with arriving at possible alternatives to manage regulation and increase competitiveness in these markets.
Why Breaking Big Tech Is Not A Solution
Read the article here
Many political commentators in India and elsewhere have echoed Elizabeth Warren’s call for breaking up Big Tech as a solution. There is enough evidence that breaking Big Tech is not a wise idea considering the ideal objectives of regulation.
Zachary Karrabell writes that the current landscape of technology has left consumers with little privacy even as their data is converted into vast corporate profit. The marketplace for online services is bereft of meaningful competition, and it is potentially corrosive of democracy. Competition in the antitrust framework is means to a set of ends—namely, “economic liberty,” unfettered trade, lower prices, and better services for consumers. Limiting acquisitions, as Warren suggests, could have the unintended consequence of depressing spending on innovation rather than unlocking it, and making it harder for smaller companies to raise money.
Antitrust was invented during the Progressive Era as a means to address issues of price, access, and competition. What we need now is a new regulatory framework based on today’s issues: privacy (who owns and profits from data), competition, and innovation. Those should be the starting points for developing policy, in place of a focus on the size or number of tech companies. We need to ask what rules would protect consumers, ensure continued innovation, and allow for competition, without creating additional, unintended problems.
Tech and Antitrust
Read the article here
Ben Thompson analyzes the four Big Tech companies across four key points -
Whether or not they have a durable monopoly
What anti-competitive behavior they are engaging in
What remedies are available
What will happen in the future with and without regulator intervention
Thompson’s conclusions are interesting where he believes that social networks are not forever. Each generation has its own preferences, and as long as acquisition rules around network-based companies are significantly beefed up, the best solution for Facebook, from an antitrust perspective, is simply time which we are currently seeing with the ascent of TikTok.
At the end of the day these tech companies are powerful because consumers like them, not because they are the only option. Consumer welfare still matters, both in a court of law and in the court of public opinion.
Antitrust In The Indian Context
Read the article here
There are companies which can potentially become monopolies in India in some unconventional sectors. The data shows that while the number of industries or sectors with dominant firms has declined—as it often does in an expanding economy—the dominant firms’ market cap in their respective industries has increased. In the absence of robust anti-competitive regulation, these firms can then potentially misuse their market power to enrich themselves at the expense of competitors and consumers. This also underscores the need for a competent authority to ensure free and fair competition in the marketplace.
The Competition Commission of India (CCI) is the statutory body mandated to regulate anti-competitive activity in the country. The inability of CCI to consistently adjudicate and enforce punitive measures points to certain lacunae in the provisions of the Competition Act, 2002 from which the CCI derives its authority.
The network effects emerging from the Jio-Facebook deal are immense. Facebook has 241 million active users in India on its social networking site, and over 400 million WhatsApp users. With Jio having 388 million subscribers, the combined entity would be a veritable tech behemoth. With further investment from Intel as well as Google, whose Android operating system powers the majority of the 500 million smartphone users in India, Jio’s dominance will only be enhanced. Several commentators have noted that Jio Platforms is all set to become all the FAANG (Facebook, Amazon, Apple, Netflix, Google) companies rolled into one for the Indian market, while also becoming a significant global player.
With India’s atmanirbhar policy tilt, the country is looking to create globally competitive firms. For this, there might be a temptation to have a permissive outlook on domestic monopolies and allow them to scale up. However, this policy is fraught with peril and Indian consumers, as well as the economy, may end up paying a heavy price in the long-run.
The Government (CCI) vs Reliance Jio seems a possible antitrust case of the future.
Research Paper For The Week - Amazon’s Antitrust Paradox by Lina Khan
Amazon is the titan of twenty-first century commerce. In addition to being a retailer, it is now a marketing platform, a delivery and logistics network, a payment service, a credit lender, an auction house, a major book publisher, a producer of television and films, a fashion designer, a hardware manufacturer, and a leading host of cloud server space.
This paper argues that the current framework in antitrust—specifically its pegging competition to “consumer welfare,” defined as short-term price effects—is unequipped to capture the architecture of market power in the modern economy. It closes by considering two potential regimes for addressing Amazon’s power: restoring traditional antitrust and competition policy principles or applying common carrier obligations and duties.
Though focused on Amazon, this paper is a mandatory reading for anyone interested in understanding antitrust and competition law in detail. A lot of the problems and solutions are summarized from this paper.
Read the entire paper here
Conclusion - A Few Options
The efforts to regulate the Big Tech companies lie on principles of anti-monopoly, equality and decentralization of power. One suggestion recommended by Chicago Booth Stigler Center’s recent committee report on “Study of Digital Platforms Market Structure and Antitrust Subcommittee” is the creation of a Digital Authority (DA) similar to regulators in other sectors like banking, financial markets and telecommunications.
The DA could have the authority to define bottleneck power (a situation where consumers primarily rely upon a single service provider, which makes obtaining access to those consumers for the relevant activity by other service providers prohibitively costly), set pro-competitive rules on data, and partner with antitrust agencies. What is good for business need not necessarily be good for markets. Regulators in every country need to take cognizance of this aspect to ensure that the markets as well as the respective businesses are protected through their delicate balancing act of enforcing penalties and making laws to ensure compliance.
If a company is found liable for violating antitrust laws, the DA can enforce remedies such as:
a) Data sharing: Anti-competitive conduct may result in a market that has tipped in favor of a single provider which then benefits from unparalleled access to data. In those cases, a new entrant may find it impossible to service users with new products as it lacks the scale needed for effective operation. Data sharing could help restore the lost competition.
b) Full protocol interoperability: Another useful tool that could restore lost competition is an open protocol and interoperability standard that would be available for entrants to use on a continuing basis and allow them to overcome network effects. A bottleneck business whose anti-competitive conduct created a monopoly position could be required to interoperate with its competitors to provide choice for users.
c) Non-discrimination: The clear and simple remedy for a case when a bottleneck digital business favors its own content or complement is divestiture of one of the businesses, either the bottleneck business or the content/applications. This removes both the incentive and the ability for the conduct. However, this structural remedy could be costly to consumers in various ways, leading to the conclusion that a behavioral non-discrimination remedy might be more appropriate
d) Unbundling: Incumbents can be prohibited from tying or bundling multiple services. The requirement to unbundle contracts could be an antitrust remedy that is less onerous than divestiture.
Another area of improvement is conducting a detailed ex-ante review of mergers and acquisitions in the technology space to eliminate any potential possibility of monopolistic advantage or synergies leveraged in the future. Often, the fact that a merger may be contemplated to thwart potential competition is ignored and dismissed as being speculative. Broader, tougher and thorough M&A standards, especially when it comes to large mergers is an area where legislative action is warranted. Merger reviews are of public importance that have large implications on every country’s citizens and representatives of public i.e. the political representatives cannot be kept in the dark.
Breakups are the last of all alternatives, as described above, that need to be done very thoughtfully as they have proved to realign the incentives of an industry by changing market dynamics. They are structural solutions which self-execute through free markets and help in dealing with competition problems.
Lina Khan, on the other hand, suggests two different approaches when it comes to Amazon and other platforms. She writes -
“Key is deciding whether we want to govern online platform markets through competition, or want to accept that they are inherently monopolistic or oligopolistic and regulate them instead. If we take the former approach, we should reform antitrust law to prevent this dominance from emerging or to limit its scope. If we take the latter approach, we should adopt regulations to take advantage of these economies of scale while neutering the firm’s ability to exploit its dominance.”
As we progress, this policy issue will repeat across different countries. Every country is likely going to adopt laws based on their ideals. Most of the foundational laws in democracies like the Constitution of India are created with the idea that power of individuals or institutions should be limited - it should be distributed, decentralized, checked and balanced so that no person or institution enjoys unaccountable influence. It was not anticipated by the drafters that a private power like a corporation might arise to attain such power and influence. By enforcing regulations that ensures appropriate checks and balances on the Big Tech companies, it can give all citizens a chance against checking the power of these corporations and build a nation that lives up to its cherished ideals.
Afterthought
“Power isn't wealth or sophistication or complexity. Power is the ability to make people do things they don't want to do”
- Roger Lovatt
This completes our comprehensive report on Big Tech and Antitrust. We hope you enjoyed this edition. If you found this newsletter worth your time, do share it with your friends.
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Take care, stay safe and have a nice weekend. We shall see you next Saturday.