An Economic Argument for Antitrust Inaction and the Consumer Welfare Principle

There has been a proliferation of antitrust actions in the tech space in recent years. Though the antitrust division of the Department of Justice (DOJ) and the Federal Trade Commission (FTC) have long purported to act on the basis of the consumer welfare standard, they seem increasingly willing to intervene in markets for ideological reasons. If antitrust action is a hammer, competitive markets have become a nail. The most recent domino in this expansion of antitrust action is so-called “Big Tech.” These companies, which generally include Google, Amazon, Apple, and Meta, among others, face an avalanche of antitrust actions.

Despite the DOJ’s concerns, most—if not all—of the antitrust cases brought against these companies are unfounded. The companies in question may be large, but this alone does not indicate a monopoly or material harm to the consumer. Large firms are incentivized through profit to provide surplus value to consumers while operating from a precarious perch atop an unpredictable industry segment. In the face of variable repercussions, the benefits firms like these provide to consumers outweigh the moral victory of antitrust action.

In order to capture a large market share, firms must provide customers with a surplus of value as compared to the competition. Google, for example, burst onto the scene as a pioneer in the search space, offering an innovative product that was simply better than the alternatives. As Google has grown, it has further improved search and developed new products and processes that have ultimately garnered roughly a 90 percent share of today’s general searches. The majority of Microsoft Windows users navigate through the default Bing search engine to download Google Chrome—not because they have to, but because they prefer it. Firms like Google, with dominant market positions, reached the pinnacle of their sector through rigorous innovation that provided value to the consumer.

Large companies are often more efficient, further benefiting consumers by keeping prices low without sacrificing quality. This efficiency develops within production processes due to the profit incentive. Firms tirelessly search for innovation and efficiency to spur growth, effectively cutting costs in these processes while expanding their potential for profit. Indeed, a firm must provide a good or service that is highly desired by the public in order to make a profit in the marketplace, rent-seeking notwithstanding. A large firm has likely grown to its current size by economizing production, thereby producing more product at a lower cost than their competitors.

The risk antitrust action then poses is twofold: First, splitting large firms into component parts negates the efficiencies that allow firms to provide generally affordable products. Reverting a firm to a smaller size lessens economies of scale and creates higher prices for the consumer. Even more reserved sanctions against a firm, such as significant fines, negatively impact these efficiencies while carrying massive opportunity costs. Second, antitrust action has the potential to dilute the incentive for innovation. Splitting firms into component parts forces the newly minted firms to charge higher prices for the services consumers were already consuming. In effect, a state of artificially imposed competition may actually be worse for the consumer than a monopoly. So long as the firm in question developed without interference from the government in the first place, it is the consumer who stands to lose the most when antitrust action is undertaken in this context.

The practical problem in recent antitrust action is the weak position of monopoly power within the market context. Many think of the market as a stagnant entity, a state of affairs that operates at economic equilibrium in perpetuity lest something destabilize the operation. But the market is far more dynamic than this. Rather than operating at an equilibrium state, markets progress toward it in an ongoing process driven by innovation and entrepreneurship.

Think of markets like the child’s game “King of the Hill” being played on a pile of loose gravel. While the players constantly compete to control the top of the pile, that position is inherently unstable. Firms compete on a spontaneous front, planning and combating new innovations and new competitors from segments that could never have been predicted. Which techno wizard would have predicted ChatGPT would become an emergent competitor of Google Search? Unrestricted markets are necessarily unstable in their quest for equilibrium. Those markets that naturally develop a monopoly are no different. A major concern the DOJ and FTC have with monopoly power is its ability to restrain new competition. But in a market process where future advances, entrants, and innovations are entirely unpredictable, monopolies hold little to no leverage on the future because they cannot predict where their primary challengers will arise.

This uncertainty renders antitrust action perilous at best. Markets are dynamic, competition is faced in both direct and indirect industries, and persistent innovation drives growth. Therefore, any antitrust action must be constrained by the consumer welfare standard—and nothing more. The future is uncertain, and government intervention has always led to unintended outcomes. Antitrust action, then, is best leveraged when there is proof of harm to consumer welfare. Otherwise, it is best to holster that antitrust hammer back in the government’s tool belt.

This post has been updated for clarity.