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[TOTM: The following is part of a digital symposium by TOTM guests and authors on the law, economics, and policy of the antitrust lawsuits against Google. The entire series of posts is available here.]

Judges sometimes claim that they do not pick winners when they decide antitrust cases. Nothing could be further from the truth.

Competitive conduct by its nature harms competitors, and so if antitrust were merely to prohibit harm to competitors, antitrust would then destroy what it is meant to promote.

What antitrust prohibits, therefore, is not harm to competitors but rather harm to competitors that fails to improve products. Only in this way is antitrust able to distinguish between the good firm that harms competitors by making superior products that consumers love and that competitors cannot match and the bad firm that harms competitors by degrading their products without offering consumers anything better than what came before.

That means, however, that antitrust must pick winners: antitrust must decide what is an improvement and what not. And a more popular search engine is a clear winner.

But one should not take its winningness for granted. For once upon a time there was another winner that the courts always picked, blocking antitrust case after antitrust case. Until one day the courts stopped picking it.

That was the economy of scale.

The Structure of the Google Case

Like all antitrust cases that challenge the exercise of power, the government’s case against Google alleges denial of an input to competitors in some market. Here the input is default search status in smartphones, the competitors are rival search providers, and the market is search advertising. The basic structure of the case is depicted in the figure below.

Although brought as a monopolization case under Section 2 of the Sherman Act, this is at heart an exclusive dealing case of the sort normally brought under Section 1 of the Sherman Act: the government’s core argument is that Google uses contracts with smartphone makers, pursuant to which the smartphone makers promise to make Google, and not competitors, the search default, to harm competing search advertising providers and by extension competition in the search advertising market.

The government must show anticompetitive conduct, monopoly power, and consumer harm in order to prevail.

Let us assume that there is monopoly power. The company has more than 70% of the search advertising market, which is in the zone normally required to prove that element of a monopolization claim.

The problem of anticompetitive conduct is only slightly more difficult.

Anticompetitive conduct is only ever one thing in antitrust: denial of an essential input to a competitor. There is no other way to harm rivals.

(To be sure, antitrust prohibits harm to competition, not competitors, but that means only that harm to competitors necessary but insufficient for liability. The consumer harm requirement decides whether the requisite harm to competitors is also harm to competition.)

It is not entirely clear just how important default search status really is to running a successful search engine, but let us assume that it is essential, as the government suggests.

Then the question whether Google’s contracts are anticompetitive turns on how much of the default search input Google’s contracts foreclose to rival search engines. If a lot, then the rivals are badly harmed. If a little, then there may be no harm at all.

The answer here is that there is a lot of foreclosure, at least if the government’s complaint is to be believed. Through its contracts with Apple and makers of Android phones, Google has foreclosed default search status to rivals on virtually every single smartphone.

That leaves consumer harm. And here is where things get iffy.

Usage as a Product Improvement: A Very Convenient Argument

The inquiry into consumer harm evokes measurements of the difference between demand curves and price lines, or extrapolations of compensating and equivalent variation using indifference curves painstakingly pieced together based on the assumptions of revealed preference.

But while the parties may pay experts plenty to spin such yarns, and judges may pretend to listen to them, in the end, for the judges, it always comes down to one question only: did exclusive dealing improve the product?

If it did, then the judge assumes that the contracts made consumers better off and the defendant wins. And if it did not, then off with their heads.

So, does foreclosing all this default search space to competitors make Google search advertising more valuable to advertisers?

Those who leap to Google’s defense say yes, for default search status increases the number of people who use Google’s search engine. And the more people use Google’s search engine, the more Google learns about how best to answer search queries and which advertisements will most interest which searchers. And that ensures that even more people will use Google’s search engine, and that Google will do an even better job of targeting ads on its search engine.

And that in turn makes Google’s search advertising even better: able to reach more people and to target ads more effectively to them.

None of that would happen if defaults were set to other engines and users spurned Google, and so foreclosing default search space to rivals undoubtedly improves Google’s product.

This is a nice argument. Indeed, it is almost too nice, for it seems to suggest that almost anything Google might do to steer users away from competitors and to itself deserves antitrust immunity. Suppose Google were to brandish arms to induce you to run your next search on Google. That would be a crime, but, on this account, not an antitrust crime. For getting you to use Google does make Google better.

The argument that locking up users improves the product is of potential use not just to Google but to any of the many tech companies that run on advertising—Facebook being a notable example—so it potentially immunizes an entire business model from antitrust scrutiny.

It turns out that has happened before.

Economies of Scale as a Product Improvement: Once a Convenient Argument

Once upon a time, antitrust exempted another kind of business for which products improve the more people used them. The business was industrial production, and it differs from online advertising only in the irrelevant characteristic that the improvement that comes with expanding use is not in the quality of the product but in the cost per unit of producing it.

The hallmark of the industrial enterprise is high fixed costs and low marginal costs. The textile mill differs from pre-industrial piecework weaving in that once a $10 million investment in machinery has been made, the mill can churn out yard after yard of cloth for pennies. The pieceworker, by contrast, makes a relatively small up-front investment—the cost of raising up the hovel in which she labors and making her few tools—but spends the same large amount of time to produce each new yard of cloth.

Large fixed costs and low marginal costs lie at the heart of the bounty of the modern age: the more you produce, the lower the unit cost, and so the lower the price at which you can sell your product. This is a recipe for plenty.

But it also means that, so long as consumer demand in a given market is lower than the capacity of any particular plant, driving buyers to a particular seller and away from competitors always improves the product, in the sense that it enables the firm to increase volume and reduce unit cost, and therefore to sell the product at a lower price.

If the promise of the modern age is goods at low prices, then the implication is that antitrust should never punish firms for driving rivals from the market and taking over their customers. Indeed, efficiency requires that only one firm should ever produce in any given market, at least in any market for which a single plant is capable of serving all customers.

For antitrust in the late 19th and early 20th centuries, beguiled by this advantage to size, exclusive dealing, refusals to deal, even the knife in a competitor’s back: whether these ran afoul of other areas of law or not, it was all for the better because it allowed industrial enterprises to achieve economies of scale.

It is no accident that, a few notable triumphs aside, antitrust did not come into its own until the mid-1930s, 40 years after its inception, on the heels of an intellectual revolution that explained, for the first time, why it might actually be better for consumers to have more than one seller in a market.

The Monopolistic Competition Revolution

The revolution came in the form of the theory of monopolistic competition and its cousin, the theory of creative destruction, developed between the 1920s and 1940s by Edward Chamberlin, Joan Robinson and Joseph Schumpeter.

These theories suggested that consumers might care as much about product quality as they do about product cost, and indeed would be willing to abandon a low-cost product for a higher-quality, albeit more expensive, one.

From this perspective, the world of economies of scale and monopoly production was the drab world of Soviet state-owned enterprises churning out one type of shoe, one brand of cleaning detergent, and so on.

The world of capitalism and technological advance, by contrast, was one in which numerous firms produced batches of differentiated products in amounts sometimes too small fully to realize all scale economies, but for which consumers were nevertheless willing to pay because the products better fit their preferences.

What is more, the striving of monopolistically competitive firms to lure away each other’s customers with products that better fit their tastes led to disruptive innovation— “creative destruction” was Schumpeter’s famous term for it—that brought about not just different flavors of the same basic concept but entirely new concepts. The competition to create a better flip phone, for example, would lead inevitably to a whole new paradigm, the smartphone.

This reasoning combined with work in the 1940s and 1950s on economic growth that quantified for the first time the key role played by technological change in the vigor of capitalist economies—the famous Solow residual—to suggest that product improvements, and not the cost reductions that come from capital accumulation and their associated economies of scale, create the lion’s share of consumer welfare. Innovation, not scale, was king.

Antitrust responded by, for the first time in its history, deciding between kinds of product improvements, rather than just in favor of improvements, casting economies of scale out of the category of improvements subject to antitrust immunity, while keeping quality improvements immune.

Casting economies of scale out of the protected product improvement category gave antitrust something to do for the first time. It meant that big firms had to plead more than just the cost advantages of being big in order to obtain license to push their rivals around. And government could now start reliably to win cases, rather than just the odd cause célèbre.

It is this intellectual watershed, and not Thurman Arnold’s tenacity, that was responsible for antitrust’s emergence as a force after World War Two.

Usage-Based Improvements Are Not Like Economies of Scale

The improvements in advertising that come from user growth fall squarely on the quality side of the ledger—the value they create is not due to the ability to average production costs over more ad buyers—and so they count as the kind of product improvements that antitrust continues to immunize today.

But given the pervasiveness of this mode of product improvement in the tech economy—the fact that virtually any tech firm that sells advertising can claim to be improving a product by driving users to itself and away from competitors—it is worth asking whether we have not reached a new stage in economic development in which this form of product improvement ought, like economies of scale, to be denied protection.

Shouldn’t the courts demand more and better innovation of big tech firms than just the same old big-data-driven improvements they serve up year after year?

Galling as it may be to those who, like myself, would like to see more vigorous antitrust enforcement in general, the answer would seem to be “no.” For what induced the courts to abandon antitrust immunity for economies of scale in the mid-20th century was not the mere fact that immunizing economies of scale paralyzed antitrust. Smashing big firms is not, after all, an end in itself.

Instead, monopolistic competition, creative destruction and the Solow residual induced the change, because they suggested both that other kinds of product improvement are more important than economies of scale and, crucially, that protecting economies of scale impedes development of those other kinds of improvements.

A big firm that excludes competitors in order to reach scale economies not only excludes competitors who might have produced an identical or near-identical product, but also excludes competitors who might have produced a better-quality product, one that consumers would have preferred to purchase even at a higher price.

To cast usage-based improvements out of the product improvement fold, a case must be made that excluding competitors in order to pursue such improvements will block a different kind of product improvement that contributes even more to consumer welfare.

If we could say, for example, that suppressing search competitors suppresses more-innovative search engines that ad buyers would prefer, even if those innovative search engines were to lack the advantages that come from having a large user base, then a case might be made that user growth should no longer count as a product improvement immune from antitrust scrutiny.

And even then, the case against usage-based improvements would need to be general enough to justify an epochal change in policy, rather than be limited to a particular technology in a particular lawsuit. For the courts hate to balance in individual cases, statements to the contrary in their published opinions notwithstanding.

But there is nothing in the Google complaint, much less the literature, to suggest that usage-based improvements are problematic in this way. Indeed, much of the value created by the information revolution seems to inhere precisely in its ability to centralize usage.

Americans Keep Voting to Centralize the Internet

In the early days of the internet, theorists mistook its decentralized architecture for a feature, rather than a bug. But internet users have since shown, time and again, that they believe the opposite.

For example, the basic protocols governing email were engineered to allow every American to run his own personal email server.

But Americans hated the freedom that created—not least the spam—and opted instead to get their email from a single server: the one run by Google as Gmail.

The basic protocols governing web traffic were also designed to allow every American to run whatever other communications services he wished—chat, video chat, RSS, webpages—on his own private server in distributed fashion.

But Americans hated the freedom that created—not least having to build and rebuild friend networks across platforms–—and they voted instead overwhelmingly to get their social media from a single server: Facebook.

Indeed, the basic protocols governing internet traffic were designed to allow every business to store and share its own data from its own computers, in whatever form.

But American businesses hated that freedom—not least the cost of having to buy and service their own data storage machines—and instead 40% of the internet is now stored and served from Amazon Web Services.

Similarly, advertisers have the option of placing advertisements on the myriad independently-run websites that make up the internet—known in the business as the “open web”—by placing orders through competitive ad exchanges. But advertisers have instead voted mostly to place ads on the handful of highly centralized platforms known as “walled gardens,” including Facebook, Google’s YouTube and, of course, Google Search.

The communications revolution, they say, is all about “bringing people together.” It turns out that’s true.

And that Google should win on consumer harm.

Remember the Telephone

Indeed, the same mid-20th century antitrust that thought so little of economies of scale as a defense immunized usage-based improvements when it encountered them in that most important of internet precursors: the telephone.

The telephone, like most internet services, gets better as usage increases. The more people are on a particular telephone network, the more valuable the network becomes to subscribers.

Just as with today’s internet services, the advantage of a large user base drove centralization of telephone services a century ago into the hands of a single firm: AT&T. Aside from a few business executives who liked the look of a desk full of handsets, consumers wanted one phone line that they could use to call everyone.

Although the government came close to breaking AT&T up in the early 20th century, the government eventually backed off, because a phone system in which you must subscribe to the right carrier to reach a friend just doesn’t make sense.

Instead, Congress and state legislatures stepped in to take the edge off monopoly by regulating phone pricing. And when antitrust finally did break AT&T up in 1982, it did so in a distinctly regulatory fashion, requiring that AT&T’s parts connect each other’s phone calls, something that Congress reinforced in the Telecommunications Act of 1996.

The message was clear: the sort of usage-based improvements one finds in communications are real product improvements. And antitrust can only intervene if it has a way to preserve them.

The equivalent of interconnection in search, that the benefits of usage, in the form of data and attention, be shared among competing search providers, might be feasible. But it is hard to imagine the court in the Google case ordering interconnection without the benefit of decades of regulatory experience with the defendant’s operations that the district court in 1982 could draw upon in the AT&T case.

The solution for the tech giants today is the same as the solution for AT&T a century ago: to regulate rather than to antitrust.

Microsoft Not to the Contrary, Because Users Were in Common

Parallels to the government’s 1990s-era antitrust case against Microsoft are not to the contrary.

As Sam Weinstein has pointed out to me, Microsoft, like Google, was at heart an exclusive dealing case: Microsoft contracted with computer manufacturers to prevent Netscape Navigator, an early web browser, from serving as the default web browser on Windows PCs.

That prevented Netscape, the argument went, from growing to compete with Windows in the operating system market, much the way the Google’s Chrome browser has become a substitute for Windows on low-end notebook computers today.

The D.C. Circuit agreed that default status was an essential input for Netscape as it sought eventually to compete with Windows in the operating system market.

The court also accepted the argument that the exclusive dealing did not improve Microsoft’s operating system product.

This at first seems to contradict the notion that usage improves products, for, like search advertising, operating systems get better as their user bases increase. The more people use an operating system, the more application developers are willing to write for the system, and the better the system therefore becomes.

It seems to follow that keeping competitors off competing operating systems and on Windows made Windows better. If the court nevertheless held Microsoft liable, it must be because the court refused to extend antitrust immunity to usage-based improvements.

The trouble with this line of argument is that it ignores the peculiar thing about the Microsoft case: that while the government alleged that Netscape was a potential competitor of Windows, Netscape was also an application that ran on Windows.

That means that, unlike Google and rival search engines, Windows and Netscape shared users.

So, Microsoft’s exclusive dealing did not increase its user base and therefore could not have improved Windows, at least not by making Windows more appealing for applications developers. Driving Netscape from Windows did not enable developers to reach even one more user. Conversely, allowing Netscape to be the default browser on Windows would not have reduced the number of Windows users, because Netscape ran on Windows.

By contrast, a user who runs a search in Bing does not run the same search simultaneously in Google, and so Bing users are not Google users. Google’s exclusive dealing therefore increases its user base and improves Google’s product, whereas Microsoft’s exclusive dealing served only to reduce Netscape’s user base and degrade Netscape’s product.

Indeed, if letting Netscape be the default browser on Windows was a threat to Windows, it was not because it prevented Microsoft from improving its product, but because Netscape might eventually have become an operating system, and indeed a better operating system, than Windows, and consumers and developers, who could be on both at the same time if they wished, might have nevertheless chosen eventually to go with Netscape alone.

Though it does not help the government in the Google case, Microsoft still does offer a beacon of hope for those concerned about size, for Microsoft’s subsequent history reminds us that yesterday’s behemoth is often today’s also ran.

And the favorable settlement terms Microsoft ultimately used to escape real consequences for its conduct 20 years ago imply that, at least in high-tech markets, we don’t always need antitrust for that to be true.

[TOTM: The following is part of a blog series by TOTM guests and authors on the law, economics, and policy of the ongoing COVID-19 pandemic. The entire series of posts is available here.

This post is authored by Ramsi Woodcock, (Assistant Professor of Law, University of Kentucky; Assistant Professor of Management, Gatton College of Business and Economics).]

Specialists know that the antitrust courses taught in law schools and economics departments have an alter ego in business curricula: the course on business strategy. The two courses cover the same material, but from opposite perspectives. Antitrust courses teach how to end monopolies; strategy courses teach how to construct and maintain them.

Strategy students go off and run businesses, and antitrust students go off and make government policy. That is probably the proper arrangement if the policy the antimonopolists make is domestic. We want the domestic economy to run efficiently, and so we want domestic policymakers to think about monopoly—and its allocative inefficiencies—as something to be discouraged.

The coronavirus, and the shortages it has caused, have shown us that putting the antimonopolists in charge of international policy is, by contrast, a very big mistake.

Because we do not yet have a world government. America’s position, in relation to the rest of the world, is therefore more akin to that of a business navigating a free market than it is to a government seeking to promote efficient interactions among the firms that it governs. To flourish, America must engage in international trade with a view to creating and maintaining monopoly positions for itself, rather than eschewing them in the interest of realizing efficiencies in the global economy. Which is to say: we need strategists, not antimonopolists.

For the global economy is not America, and there is no guarantee that competitive efficiencies will redound to America’s benefit, rather than to those of her competitors. Absent a world government, other countries will pursue monopoly regardless what America does, and unless America acts strategically to build and maintain economic power, America will eventually occupy a position of commercial weakness, with all of the consequences for national security that implies.

When Antimonopolists Make Trade Policy

The free traders who have run American economic policy for more than a generation are antimonopolists playing on a bigger stage. Like their counterparts in domestic policy, they are loyal in the first instance only to the efficiency of the market, not to any particular trader. They are content to establish rules of competitive trading—the antitrust laws in the domestic context, the World Trade Organization in the international context—and then to let the chips fall where they may, even if that means allowing present or future adversaries to, through legitimate means, build up competitive advantages that the United States is unable to overcome.

Strategy is consistent with competition when markets are filled with traders of atomic size, for then no amount of strategy can deliver a competitive advantage to any trader. But global markets, more even than domestic markets, are filled with traders of macroscopic size. Strategy then requires that each trader seek to gain and maintain advantages, undermining competition. The only way antimonopolists could induce the trading behemoth that is America to behave competitively, and to let the chips fall where they may, was to convince America voluntarily to give up strategy, to sacrifice self-interest on the altar of efficient markets.

And so they did.

Thus when the question arose whether to permit American corporations to move their manufacturing operations overseas, or to permit foreign companies to leverage their efficiencies to dominate a domestic industry and ensure that 90% of domestic supply would be imported from overseas, the answer the antimonopolists gave was: “yes.” Because it is efficient. Labor abroad is cheaper than labor at home, and transportation costs low, so efficiency requires that production move overseas, and our own resources be reallocated to more competitive uses.

This is the impeccable logic of static efficiency, of general equilibrium models allocating resources optimally. But it is instructive to recall that the men who perfected this model were not trying to describe a free market, much less international trade. They were trying to create a model that a central planner could use to allocate resources to a state’s subjects. What mattered to them in building the model was the good of the whole, not any particular part. And yet it is to a particular part of the global whole that the United States government is dedicated.

The Strategic Trader

Students of strategy would have taken a very different approach to international trade. Strategy teaches that markets are dynamic, and that businesses must make decisions based not only on the market signals that exist today, but on those that can be made to exist in the future. For the successful strategist, unlike the antimonopolist, identifying a product for which consumers are willing to pay the costs of production is not alone enough to justify bringing the product to market. The strategist must be able to secure a source of supply, or a distribution channel, that competitors cannot easily duplicate, before the strategist will enter.

Why? Because without an advantage in supply, or distribution, competitors will duplicate the product, compete away any markups, and leave the strategist no better off than if he had never undertaken the project at all. Indeed, he may be left bankrupt, if he has sunk costs that competition prevents him from recovering. Unlike the economist, the strategist is interested in survival, because he is a partisan of a part of the market—himself—not the market entire. The strategist understands that survival requires power, and all power rests, to a greater or lesser degree, on monopoly.

The strategist is not therefore a free trader in the international arena, at least not as a matter of principle. The strategist understands that trading from a position of strength can enrich, and trading from a position of weakness can impoverish. And to occupy that position of strength, America must, like any monopolist, control supply. Moreover, in the constantly-innovating markets that characterize industrial economies, markets in which innovation emerges from learning by doing, control over physical supply translates into control over the supply of inventions itself.

The strategist does not permit domestic corporations to offshore manufacturing in any market in which the strategist wishes to participate, because that is unsafe: foreign countries could use control over that supply to extract rents from America, to drive domestic firms to bankruptcy, and to gain control over the supply of inventions.

And, as the new trade theorists belatedly discovered, offshoring prevents the development of the dense, geographically-contiguous, supply networks that confer power over whole product categories, such as the electronics hub in Zhengzhou, where iPhone-maker Foxconn is located.

Or the pharmaceutical hub in Hubei.

Coronavirus and the Failure of Free Trade

Today, America is unprepared for the coming wave of coronavirus cases because the antimonopolists running our trade policy do not understand the importance of controlling supply. There is a shortage of masks, because China makes half of the world’s masks, and the Chinese have cut off supply, the state having forbidden even non-Chinese companies that offshored mask production from shipping home masks for which American customers have paid. Not only that, but in January China bought up most of the world’s existing supply of masks, with free-trade-obsessed governments standing idly by as the clock ticked down to their own domestic outbreaks.  

New York State, which lies at the epicenter of the crisis, has agreed to pay five times the market price for foreign supply. That’s not because the cost of making masks has risen, but because sellers are rationing with price. Which is to say: using their control over supply to beggar the state. Moreover, domestic mask makers report that they cannot ramp up production because of a lack of supply of raw materials, some of which are actually made in Wuhan, China. That’s the kind of problem that does not arise when restrictions on offshoring allow manufacturing hubs to develop domestically.

But a shortage of masks is just the beginning. Once a vaccine is developed, the race will be on to manufacture it, and America controls less than 30% of the manufacturing facilities that supply pharmaceuticals to American markets. Indeed, just about the only virus-relevant industries in which we do not have a real capacity shortage today are food and toilet paper, panic buying notwithstanding. Because fortunately for us antimonopolists could not find a way to offshore California and Oregon. If they could have, they surely would have, since both agriculture and timber are labor-intensive industries.

President Trump’s failed attempt to buy a German drug company working on a coronavirus vaccine shows just how damaging free market ideology has been to national security: as Trump should have anticipated given his resistance to the antimonopolists’ approach to trade, the German government nipped the deal in the bud. When an economic agent has market power, the agent can pick its prices, or refuse to sell at all. Only in general equilibrium fantasy is everything for sale, and at a competitive price to boot.

The trouble is: American policymakers, perhaps more than those in any other part of the world, continue to act as though that fantasy were real.

Failures Left and Right

America’s coronavirus predicament is rich with intellectual irony.

Progressives resist free trade ideology, largely out of concern for the effects of trade on American workers. But they seem not to have realized that in doing so they are actually embracing strategy, at least for the benefit of labor.

As a result, progressives simultaneously reject the approach to industrial organization economics that underpins strategic thinking in business: Joseph Schumpeter’s theory of creative destruction, which holds that strategic behavior by firms seeking to achieve and maintain monopolies is ultimately good for society, because it leads to a technological arms race as firms strive to improve supply, distribution, and indeed product quality, in ways that competitors cannot reproduce.

Even if progressives choose to reject Schumpeter’s argument that strategy makes society better off—a proposition that is particularly suspect at the international level, where the availability of tanks ensures that the creative destruction is not always creative—they have much to learn from his focus on the economics of survival.

By the same token, conservatives embrace Schumpeter in arguing for less antitrust enforcement in domestic markets, all the while advocating free trade at the international level and savaging governments for using dumping and tariffs—which is to say, the tools of monopoly—to strengthen their trading positions. It is deeply peculiar to watch the coronavirus expose conservative economists as pie-in-the-sky internationalists. And yet as the global market for coronavirus necessities seizes up, the ideology that urged us to dispense with producing these goods ourselves, out of faith that we might always somehow rely on the support of the rest of the world, provided through the medium of markets, looks pathetically naive.

The cynic might say that inconsistency has snuck up on both progressives and conservatives because each remains too sympathetic to a different domestic constituency.

Dodging a Bullet

America is lucky that a mere virus exposed the bankruptcy of free trade ideology. Because war could have done that instead. It is difficult to imagine how a country that cannot make medical masks—much less a Macbook—would be able to respond effectively to a sustained military attack from one of the many nations that are closing the technological gap long enjoyed by the United States.

The lesson of the coronavirus is: strategy, not antitrust.

Big Ink vs. Bigger Tech

Ramsi Woodcock —  30 December 2019

[TOTM: The following is the fifth in a series of posts by TOTM guests and authors on the politicization of antitrust. The entire series of posts is available here.]

This post is authored by Ramsi Woodcock, Assistant Professor, College of Law, and Assistant Professor, Department of Management at Gatton College of Business & Economics, University of Kentucky.

When in 2011 Paul Krugman attacked the press for bending over backwards to give equal billing to conservative experts on social security, even though the conservatives were plainly wrong, I celebrated. Social security isn’t the biggest part of the government’s budget, and calls to privatize it in order to save the country from bankruptcy were blatant fear mongering. Why should the press report those calls with a neutrality that could mislead readers into thinking the position reasonable?

Journalists’ ethic of balanced reporting looked, at the time, like gross negligence at best, and deceit at worst. But lost in the pathos of the moment was the rationale behind that ethic, which is not so much to ensure that the truth gets into print as to prevent the press from making policy. For if journalists do not practice balance, then they ultimately decide the angle to take.

And journalists, like the rest of us, will choose their own.

The dark underbelly of the engaged journalism unleashed by progressives like Krugman has nowhere been more starkly exposed than in the unfolding assault of journalists, operating as a special interest, on Google, Facebook, and Amazon, three companies that writers believe have decimated their earnings over the past decade.

In story after story, journalists have manufactured an antitrust movement aimed at breaking up these companies, even though virtually no expert in antitrust law or economics, on either the right or the left, can find an antitrust case against them, and virtually no expert would place any of these three companies at the top of the genuinely long list of monopolies in America that are due for an antitrust reckoning.

Bitter ledes

Headlines alone tell the story. We have: “What Happens After Amazon’s Domination Is Complete? Its Bookstore Offers Clues”; “Be Afraid, Jeff Bezos, Be Very Afraid”; “How Should Big Tech Be Reined In? Here Are 4 Prominent Ideas”;  “The Case Against Google”; and “Powerful Coalition Pushes Back on Anti-Tech Fervor.”

My favorite is: “It’s Time to Break Up Facebook.” Unlike the others, it belongs to an Op-Ed, so a bias is appropriate. Not appropriate, however, is the howler, contained in the article’s body, that “a host of legal scholars like Lina Khan, Barry Lynn and Ganesh Sitaraman are plotting a way forward” toward breakup. Lina Khan has never held an academic appointment. Barry Lynn does not even have a law degree. And Ganesh Sitaraman’s academic specialty is constitutional law, not antitrust. But editors let it through anyway.

As this unguarded moment shows, the press has treated these and other members of a small network of activists and legal scholars who operate on antitrust’s fringes as representative of scholarly sentiment regarding antitrust action. The only real antitrust scholar among them is Tim Wu, who, when you look closely at his public statements, has actually gone no further than to call for Facebook to unwind its acquisitions of Instagram and WhatsApp.

In more sober moments, the press has acknowledged that the law does not support antitrust attacks on the tech giants. But instead of helping readers to understand why, the press instead presents this as a failure of the law. “To Take Down Big Tech,” read one headline in The New York Times, “They First Need to Reinvent the Law.” I have documented further instances of unbalanced reporting here.

This is not to say that we don’t need more antitrust in America. Herbert Hovenkamp, who the New York Times once recognized as  “the dean of American antitrust law,” but has since downgraded to “an antitrust expert” after he came out against the breakup movement, has advocated stronger monopsony enforcement across labor markets. Einer Elhauge at Harvard is pushing to prevent index funds from inadvertently generating oligopolies in markets ranging from airlines to pharmacies. NYU economist Thomas Philippon has called for deconcentration of banking. Yale’s Fiona Morton has pointed to rising markups across the economy as a sign of lax antitrust enforcement. Jonathan Baker has argued with great sophistication for more antitrust enforcement in general.

But no serious antitrust scholar has traced America’s concentration problem to the tech giants.

Advertising monopolies old and new

So why does the press have an axe to grind with the tech giants? The answer lies in the creative destruction wrought by Amazon on the publishing industry, and Google and Facebook upon the newspaper industry.

Newspapers were probably the most durable monopolies of the 20th century, so lucrative that Warren Buffett famously picked them as his preferred example of businesses with “moats” around them. But that wasn’t because readers were willing to pay top dollar for newspapers’ reporting. Instead, that was because, incongruously for organizations dedicated to exposing propaganda of all forms on their front pages, newspapers have long striven to fill every other available inch of newsprint with that particular kind of corporate propaganda known as commercial advertising.

It was a lucrative arrangement. Newspapers exhibit powerful network effects, meaning that the more people read a paper the more advertisers want to advertise in it. As a result, many American cities came to have but one major newspaper monopolizing the local advertising market.

One such local paper, the Lorain Journal of Lorain, Ohio, sparked a case that has since become part of the standard antitrust curriculum in law schools. The paper tried to leverage its monopoly to destroy a local radio station that was competing for its advertising business. The Supreme Court affirmed liability for monopolization.

In the event, neither radio nor television ultimately undermined newspapers’ advertising monopolies. But the internet is different. Radio, television, and newspaper advertising can coexist, because they can target only groups, and often not the same ones, minimizing competition between them. The internet, by contrast, reaches individuals, making it strictly superior to group-based advertising. The internet also lets at least some firms target virtually all individuals in the country, allowing those firms to compete with all comers.

You might think that newspapers, which quickly became an important web destination, were perfectly positioned to exploit the new functionality. But being a destination turned out to be a problem. Consumers reveal far more valuable information about themselves to web gateways, like search and social media, than to particular destinations, like newspaper websites. But consumer data is the key to targeted advertising.

That gave Google and Facebook a competitive advantage, and because these companies also enjoy network effects—search and social media get better the more people use them—they inherited the newspapers’ old advertising monopolies.

That was a catastrophe for journalists, whose earnings and employment prospects plummeted. It was also a catastrophe for the public, because newspapers have a tradition of plowing their monopoly profits into investigative journalism that protects democracy, whereas Google and Facebook have instead invested their profits in new technologies like self-driving cars and cryptocurrencies.

The catastrophe of countervailing power

Amazon has found itself in journalists’ crosshairs for disrupting another industry that feeds writers: publishing. Book distribution was Amazon’s first big market, and Amazon won it, driving most brick and mortar booksellers to bankruptcy. Publishing, long dominated by a few big houses that used their power to extract high wholesale prices from booksellers, some of the profit from which they passed on to authors as royalties, now faced a distribution industry that was even more concentrated and powerful than was publishing. The Department of Justice stamped out a desperate attempt by publishers to cartelize in response, and profits, and author royalties, have continued to fall.

Journalists, of course, are writers, and the disruption of publishing, taken together with the disruption of news, have left journalists with the impression that they have nowhere to turn to escape the new economy.

The abuse of antitrust

Except antitrust.

Unschooled in the fine points of antitrust policy, it seems obvious to them that the Armageddon in newspapers and publishing is a problem of monopoly and that antitrust enforcers should do something about it.  

Only it isn’t and they shouldn’t. The courts have gone to great lengths over the past 130 years to distinguish between doing harm to competition, which is prohibited by the antitrust laws, and doing harm to competitors, which is not.

Disrupting markets by introducing new technologies that make products better is no antitrust violation, even if doing so does drive legacy firms into bankruptcy, and throws their employees out of work and into the streets. Because disruption is really the only thing capitalism has going for it. Disruption is the mechanism by which market economies generate technological advances and improve living standards in the long run. The antitrust laws are not there to preserve old monopolies and oligopolies such as those long enjoyed by newspapers and publishers.

In fact, by tearing down barriers to market entry, the antitrust laws strive to do the opposite: to speed the destruction and replacement of legacy monopolies with new and more innovative ones.

That’s why the entire antitrust establishment has stayed on the sidelines regarding the tech fight. It’s hard to think of three companies that have more obviously risen to prominence over the past generation by disrupting markets using superior technologies than Amazon, Google, and Facebook. It may be possible to find an anticompetitive practice here or there—I certainly have—but no serious antitrust scholar thinks the heart of these firms’ continued dominance lies other than in their technical savvy. The nuclear option of breaking up these firms just makes no sense.

Indeed, the disruption inflicted by these firms on newspapers and publishing is a measure of the extent to which these firms have improved book distribution and advertising, just as the vast disruption created by the industrial revolution was a symptom of the extraordinary technological advances of that period. Few people, and not even Karl Marx, thought that the solution to those disruptions lay with Ned Ludd. The solution to the disruption wrought by Google, Amazon, and Facebook today similarly does not lie in using the antitrust laws to smash the machines.

Governments eventually learned to address the disruption created by the original industrial revolution not by breaking up the big firms that brought that revolution about, but by using tax and transfer, and rate regulation, to ensure that the winners share their gains with the losers. However the press’s campaign turns out, rate regulation, not antitrust, is ultimately the approach that government will take to Amazon, Google, and Facebook if these companies continue to grow in power. Because we don’t have to decide between social justice and technological advance. We can have both. And voters will demand it.

The anti-progress wing of the progressive movement

Alas, smashing the machines is precisely what journalists and their supporters are demanding in calling for the breakup of Amazon, Google, and Facebook. Zephyr Teachout, for example, recently told an audience at Columbia Law School that she would ban targeted advertising except for newspapers. That would restore newspapers’ old advertising monopolies, but also make targeted advertising less effective, for the same reason that Google and Facebook are the preferred choice of advertisers today. (Of course, making advertising more effective might not be a good thing. More on this below.)

This contempt for technological advance has been coupled with a broader anti-intellectualism, best captured by an extraordinary remark made by Barry Lynn, director of the pro-breakup Open Markets Institute, and sometime advocate for the Author’s Guild. The Times quotes him saying that because the antitrust laws once contained a presumption against mergers to market shares in excess of 25%, all policymakers have to do to get antitrust right is “be able to count to four. We don’t need economists to help us count to four.”

But size really is not a good measure of monopoly power. Ask Nokia, which controlled more than half the market for cell phones in 2007, on the eve of Apple’s introduction of the iPhone, but saw its share fall almost to zero by 2012. Or Walmart, the nation’s largest retailer and a monopolist in many smaller retail markets, which nevertheless saw its stock fall after Amazon announced one-day shipping.

Journalists themselves acknowledge that size does not always translate into power when they wring their hands about the Amazon-driven financial troubles of large retailers like Macy’s. Determining whether a market lacks competition really does require more than counting the number of big firms in the market.

I keep waiting for a devastating critique of arguments that Amazon operates in highly competitive markets to emerge from the big tech breakup movement. But that’s impossible for a movement that rejects economics as a corporate plot. Indeed, even an economist as pro-antitrust as Thomas Philippon, who advocates a return to antitrust’s mid-20th century golden age of massive breakups of firms like Alcoa and AT&T, affirms in a new book that American retail is actually a bright spot in an otherwise concentrated economy.

But you won’t find journalists highlighting that. The headline of a Times column promoting Philippon’s book? “Big Business Is Overcharging you $5000 a Year.” I tend to agree. But given all the anti-tech fervor in the press, Philippon’s chapter on why the tech giants are probably not an antitrust problem ought to get a mention somewhere in the column. It doesn’t.

John Maynard Keynes famously observed that “though no one will believe it—economics is a technical and difficult subject.” So too antitrust. A failure to appreciate the field’s technical difficulty is manifest also in Democratic presidential candidate Elizabeth Warren’s antitrust proposals, which were heavily influenced by breakup advocates.

Warren has argued that no large firm should be able to compete on its own platforms, not seeming to realize that doing business means competing on your own platforms. To show up to work in the morning in your own office space is to compete on a platform, your office, from which you exclude competitors. The rule that large firms (defined by Warren as those with more than $25 billion in revenues) cannot compete on their own platforms would just make doing large amounts of business illegal, a result that Warren no doubt does not desire.

The power of the press

The press’s campaign against Amazon, Google, and Facebook is working. Because while they may not be as well financed as Amazon, Google, or Facebook, writers can offer their friends something more valuable than money: publicity.

That appears to have induced a slew of politicians, including both Senator Warren on the left and Senator Josh Hawley on the right, to pander to breakup advocates. The House antitrust investigation into the tech giants, led by a congressman who is simultaneously championing legislation advocated by the News Media Alliance, a newspaper trade group, to give newspapers an exemption from the antitrust laws, may also have similar roots. So too the investigations announced by dozens of elected state attorneys general.

The investigations recently opened by the FTC and Department of Justice may signal no more than a desire not to look idle while so many others act. Which is why the press has the power to turn fiction into reality. Moreover, under the current Administration, the Department of Justice has already undertaken two suspiciously partisan antitrust investigations, and President Trump has made clear his hatred for the liberal bastions that are Amazon, Google and Facebook. The fact that the press has made antitrust action against the tech giants a progressive cause provides convenient cover for the President to take down some enemies.

The future of the news

Rate regulation of Amazon, Google, or Facebook is the likely long-term resolution of concerns about these firms’ power. But that won’t bring back newspapers, which henceforth will always play the loom to Google and Facebook’s textile mills, at least in the advertising market.

Journalists and their defenders, like Teachout, have been pushing to restore newspapers’ old monopolies by government fiat. No doubt that would make existing newspapers, and their staffs, very happy. But what is good for Big News is not necessarily good for journalism in the long run.

The silver lining to the disruption of newspapers’ old advertising monopolies is that it has created an opportunity for newspapers to wean themselves off a funding source that has always made little sense for organizations dedicated to helping Americans make informed, independent decisions, free of the manipulation of others.

For advertising has always had a manipulative function, alongside its function of disseminating product information to consumers. And, as I have argued elsewhere, now that the vast amounts of product information available for free on the internet have made advertising obsolete as a source of product information, manipulation is now advertising’s only real remaining function.

Manipulation causes consumers to buy products they don’t really want, giving firms that advertise a competitive advantage that they don’t deserve. That makes for an antitrust problem, this time with real consequences not just for competitors, but also for technological advance, as manipulative advertising drives dollars away from superior products toward advertised products, and away from investment in innovation and toward investment in consumer seduction.

The solution is to ban all advertising, targeted or not, rather than to give newspapers an advertising monopoly. And to give journalism the state subsidies that, like all public goods, from defense to highways, are journalism’s genuine due. The BBC provides a model of how that can be done without fear of government influence.

Indeed, Teachout’s proposed newspaper advertising monopoly is itself just a government subsidy, but a subsidy extracted through an advertising medium that harms consumers. Direct government subsidization achieves the same result, without the collateral consumer harm.

The press’s brazen advocacy of antitrust action against the tech giants, without making clear how much the press itself has to gain from that action, and the utter absence of any expert support for this approach, represents an abdication by the press of its responsibility to create an informed citizenry that is every bit as profound as the press’s lapses on social security a decade ago.

I’m glad we still have social security. But I’m also starting to miss balanced journalism.

1/3/2020: Editor’s note – this post was edited for clarification and minor copy edits.