As Congress winds down with midterm elections looming, key lawmakers continue their efforts to fast-track problematic antitrust legislation for a final vote. The bill was rushed through committee in January without a proper hearing, only to be followed by a Manager’s Amendment in May that failed to address the many concerns voiced over the legislation. The bill remains flawed, suggesting that rather than rushing the bill to the floor it would be more prudent to slow the process to vet the serious issues raised by the legislation more carefully.

Specifically, S. 2992, the “American Innovation and Choice Online Act,” introduced by Sens. Amy Klobuchar (D-Minn.) and Chuck Grassley (R-Iowa), takes aim at “Big Tech,” inventing from whole cloth a new approach to antitrust law featuring substantial new restrictions on companies that fit the new definition of a “covered platform.” While this politically defined category may ultimately include a number of firms, the legislation was drafted in such a way that it currently only affects Google, Apple, Facebook and Amazon.

Most notably, the new law would reject the consumer welfare standard and instead simply ban covered platforms from engaging in many common business practices. For example, covered entities would not be able to demonstrate a preference for their own brands over third-party sellers on their platforms or engage in any activities viewed as discriminatory against other businesses using the platform—common practices that are widespread in the retail sector. The proposed bill also places the burden on the platforms to prove that changes made to help consumers are not harmful to competition, along with fines that can be set at 10 percent of total U.S. revenues generated while the company is in violation of the law. Together, these changes entail a major increase in government oversight that would push the technology sector from a permissionless innovation model to a “Mother-may-I” approach more akin to regulated industries such as telecommunications or electric utilities.

Despite the significant economic implications of the proposed legislation, there has been little economic analysis offered to support such sweeping changes. In fact, proponents of the legislation ignore the historical practice of antitrust law in the United States. Prior to the adoption of the consumer welfare standard, antitrust policy was a confused mess, with arbitrary restrictions on business activities that raised costs for consumers while doing little to promote an efficient organization of industry. The very burden of this period launched the legal and economic revolution that created the consumer welfare standard and a rule-of-reason approach to antitrust that required careful analysis on a case-by-case basis rather than simply pre-emptively prohibiting certain activities through per se restrictions on firm behavior.

With the advent of the consumer welfare standard, economists specializing in industrial organization moved beyond the “big is bad” approach to evaluating markets in favor of a more careful look at firm behavior to determine whether they were operating in an anticompetitive manner. This approach incorporated the notion that there may be economies of scale or scope that make larger firms more efficient than their smaller competitors. Moreover, economists noted that even monopolists may face market forces that limit their ability to increase prices. As a result, a rule-of-reason approach was required to assess the particular facts and circumstances of each case carefully in order to determine whether a firm was engaging in anticompetitive practices.

This necessitated careful empirical research to understand whether, for example, a merger would prove beneficial to consumers or would lead to anticompetitive behavior. Each case was unique and required its own assessment; assuming that a given firm’s size or that a given market structure generated anticompetitive outcomes is not possible. Markets are dynamic and firms must constantly adapt to changes in consumer demand, shifts in production costs and the introduction of new technologies. Firm size and structure must adapt, which raises fundamental questions about why firms exist and how they operate, as well as the ability of Congress to dictate that behavior effectively.

Eighty-five years ago, economist Ronald Coase penned one of the most famous articles in economics, a contributing factor to his 1991 Nobel Prize. “The Nature of the Firm,” published in Economica in 1937 challenged the way economists viewed businesses. It raised the important question of why firms exist. If markets are efficient, why not conduct all business in the marketplace? Every step of the production process—from sourcing raw materials to shipping final products—could be completed by transacting with specialized entities providing the necessary goods or services. Coase examined the question of why firms chose to provide some of these services internally rather than purchase them in the marketplace.

Economic theory, with its assumptions of perfect competition by small firms providing homogeneous goods could not answer that question. Ronald Coase answered the question by introducing the notion of transaction costs—constantly contracting with other parties to provide inputs can be expensive and time-consuming. Internalizing functions within the firm can reduce transaction costs and enhance the efficiency of production. This was an important lesson for understanding the structure of the economy and one that modern antitrust reformers and anti-tech progressives seem to have forgotten. Efforts to break up Big Tech with arbitrary rules on size and product lines threaten the efficiencies offered by firms that constantly evolve to meet current market structures.

The Klobuchar/Grassley antitrust bill attempts to impose arbitrary restrictions on large platforms without empirical support that either demonstrates inefficiencies in the current market structure or identifies enhanced benefits of the fundamental structural changes that the legislation proposes. Instead, it simply asserts the new market structure will allow more innovation that could eventually benefit consumers. At the same time, the proposed restrictions on the use of an affirmative defense makes it impossible for covered platforms to demonstrate that they actually generate market efficiencies due to their structure.

The proposed legislation explicitly replaces the consumer welfare standard with a new approach that elevates concerns over the welfare of competitors in the marketplace. This shift in policy is not without a price. As Federal Trade Commission Chair Lina Khan has noted: “It is possible that limiting a network monopolist’s ability to compete on its own network, would sacrifice certain cost savings, resulting in higher prices.” When regulators seek to maximize something other than consumer welfare, by definition the benefits accruing to consumers declines.

In Khan’s view, higher prices are justified by potentially greater innovation that may occur under the new rules. But little economic evidence is offered to support the claim of greater innovation. For instance, no research has been offered to support the thresholds that define a covered platform. What makes a market cap of $550 billion the optimal size for defining a covered platform? At the same time markets continue to evolve under the current system. TikTok, for example, launched just two years before the House initiated its investigation into competition in digital markets. The platform was hardly viewed as a viable competitor to the covered platforms Congress sought to regulate. Yet, by the time the House issued its report in 2020, the platform had over 689 million users; today, it has more than a billion users. Consumers change and markets evolve, making it difficult to determine a priori the most efficient market structure.

At the same time, there is much evidence to suggest that government attempts to define efficient markets have failed to provide promised benefits. From electricity markets to telecom markets, from trucking to air travel, government oversight and regulation imposed significant costs on consumers while hampering innovation. Indeed, Robert Crandall and Jerry Ellig found that freeing these markets from their government restraints generated a consumer surplus of $53.1 billion annually. (These are 1995 dollars; in 2022 dollars the annual surplus is $103 billion).

Despite being fast-tracked by Sen. Klobuchar in hopes of reaching a floor vote, the Senate has yet to vet S. 2992 properly. In addition to the procedural questions raised by the bill’s rush through the Senate and the many questions raised about potential cybersecurity threats, there are more fundamental questions about the bill’s economic impact. The legislation marks a clear departure from the economic analysis that underpins the consumer welfare approach to antitrust analysis in favor of a set of pre-emptive restrictions on market activity. These changes impede the ability of firms to adapt to evolving market conditions while abandoning the consumer welfare standard in favor of some politically determined ideal market. Not only does this harm consumers, but it also makes it difficult for covered platforms to identify and implement more efficient production strategies that promote innovation and boost productivity.

Image credit: f11photo

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