On Thursday Jan. 20, the Senate will hold a hearing on S. 2992, the “American Innovation and Choice Online Act” (AICOA). This is one of a series of bills aimed at the tech sector that, if passed, would make permissionless innovation a thing of the past. Instead, today’s dynamic and innovative tech sector would be replaced with a heavily regulated market designed by Congress and enforced by federal regulators. Despite its title, this bill does little to help innovation or consumer choice online; instead, it poses real threats to a wide range of products and services that consumers find truly beneficial.

At its core, S. 2992 is an attempt to prohibit or restrict the ability of large tech companies to compete online when they own the platform where sales take place. More specifically, the bill would make it hard for large tech companies to provide new benefits and products to consumers while forcing them to provide online rivals greater access to online platforms. Everything from offering private labels, such as Amazon Basics, to having Google Maps show up in Google searches to running an app store may be perceived as potentially unlawful conduct. While the Senate bill avoids the outright ban on self-preferencing in the House version, the practice is prohibited if it leads to “unfair competition,” the definition of which is left to the regulator’s imagination.

The bill is touted as a reform to existing antitrust laws; in fact, it is much more. S. 2992 would supplant existing antitrust laws with a new regime of regulation targeting specific companies. This is accomplished by defining “covered platforms” in a way that limits the bill to a list of specific companies—currently Facebook, Google, Amazon and Apple. It does this by establishing a carefully specified list of criteria, such as having a market cap of $550 billion or more along with given number of users (50,000,000 general users or 100,000 business users monthly). While the current target of AICOA is clearly large technology companies, it is not necessarily exclusive to tech. Over time large platforms in other sectors—like finance and banking—may find themselves defined as covered platforms subject to new regulations. And, of course, Congress may find it useful to amend the definition of covered platform in ways that provide political benefits.

For almost 50 years antitrust laws have promoted consumer welfare, targeting firms that engaged in monopolistic or anticompetitive practices. These antitrust laws applied generally to all businesses with the potential for anticompetitive behavior, with such claims evaluated through an examination of the facts to assess the economic impact of the alleged misconduct. AICOA dispenses with this approach in favor of mandated restrictions on the largest tech companies in the United States. There is no empirical analysis of consumer harm nor any assessment of whether the companies are acting in a way that is pro-consumer or economically beneficial; instead, the legislation imposes by fiat a new set of rules on one of the most dynamic sectors of the U.S. economy.

Consumer Harm

While including “choice online” in the bill’s title might suggest consumers may benefit from the legislation, AICOA is clearly designed to protect competitors rather than the competitive process and consumers. It is a step away from the consumer welfare standard, which, by definition, suggests that consumer welfare is being traded off to achieve other policy outcomes. In this case, the law draws more heavily from European competition laws, which place a priority on protecting competitors and rivals rather than economic welfare.

In fact, AICOA restricts covered platforms’ ability to compete and eliminates many practices that are clearly pro-consumer. For example, self-preferencing is prohibited by the covered platforms. This includes activities such as a covered platform offering its own store-brand or “private label” products to compete with other brands sold on the platform. Under these rules, Amazon Basics would be potentially limited in its ability to compete with its rivals.

Yet, private labels exist throughout the world of retail and are not covered by this bill. Target, for example, has 48 private labels, and generates roughly a third of its income through the sale of its private label products. Walmart, Costco and all major grocery stores sell private labels that often provide the low-cost option for consumers. This head-to-head competition is a driving factor in keeping prices low and enhancing consumer welfare. The bill does not explain why “Kirkland” is acceptable, but “Amazon Basics” is not.

Prohibiting covered platforms from engaging in pro-consumer behavior may also yield surprising consequences for consumers. Free shipping with Amazon Prime, for example, may be viewed as an illegal discriminatory practice. Many popular software products or applications that bundle a suite of services together and give consumers a discount, such as Adobe Suite, may no longer be feasible. Instead, consumers may be required to build their own bundles by searching for a host of products or features sold by rival companies. In fact, it may become challenging to define what features can be considered an integral part of a product and which are add-ons ripe for regulatory scrutiny. Consumers may have one view of what a final product should look like, but regulators may disagree.

Economic Harm

AICOA’s restrictions lower the overall level of competition in the marketplace, leaving consumers worse off while reducing innovation. The legislation assumes that rival companies will step into the breach and fill new niches as markets evolve, but it must be remembered that the research and development (R&D) budgets of the covered platforms are significantly larger than the budgets of smaller firms. Restricting the ability of covered platforms to invest in changes to their products or in other lines of business on their platforms will have an adverse effect on innovation. At the same time, rules that fragment the existing online ecosystem can generate higher costs and reduce consumer welfare.

At a more foundational level, AICOA limits practices that are economically efficient while hampering the most critical aspect of any market: price discovery. By preventing covered platforms from fully participating in the market, competition is reduced, as is the amount of information generated about consumer demand. Head-to-head competition drives prices downward as producers incorporate new information about consumer demand and the production process to create products that more closely match consumer demand at the lowest price. Markets are a process, and rivalry among firms drives prices to their lowest point. Prohibiting some companies from engaging in rivalrous behavior eliminates pressure on prices, harming consumers and slowing the pace of innovation.

AICOA also prohibits practices that may be economically efficient. In addition to nondiscrimination requirements and the ban on self-preferencing, the bill poses significant challenges to the existing business models in the digital economy. Consumers prefer their products to work together; the proposed changes may not allow this to happen. For example, can Google Search highlight YouTube content in its search results? Will Apple be able to control access to its AppStore and the security that it provides, or will it be forced to allow “sideloaded” apps with greater security and privacy risks onto its hardware?

AICOA: From Permissionless Innovation to Regulation

AICOA is not a minor refinement of the nation’s antitrust laws; it is an entirely new regulatory regime that abandons the more analytical approach to antitrust that emerged after the adoption of the consumer welfare standard. Yet there is little empirical evidence offered to demonstrate that the proposed legislation would be welfare-enhancing. No data has been provided to demonstrate that a market capitalization of $550 billion is an economically significant threshold that warrants alternative forms of regulation. Likewise, there has been no data proffered to suggest that this threshold should be the same for all the covered platforms, each of which is distinct, with different business models and different characteristics. Political expediency rather than economic efficiency appears to be the driving force of the legislation, which was written to provide new regulatory control over politically unpopular companies.

Adopting AICOA would replace the model of permissionless innovation that has driven the success of the digital economy since the internet was first commercialized in the 1990s. The rapid pace of change and the level of innovation in the digital economy fared well under the light touch of regulators with American technology companies rising to global prominence. AICOA would replace this framework with a European approach toward regulation: a greater emphasis on protecting competitors rather than consumers. This has resulted in a European tech sector that lags behind that of the United States despite the European Commission’s constant churn of billion-dollar lawsuits against American companies.

But AICOA is problematic at an even more fundamental level. Namely, the legislation lacks a basic understanding of the market process. It ignores the tremendous rivalry that occurs in the marketplace, banning many practices that are inherently pro-consumer and hallmarks of competition at work. Limiting the ability of firms to improve their products or seek out information that allows them to more accurately meet consumer demand ignores the market process that spurs innovation, keeps prices low and provides the greatest consumer satisfaction.

The flaws in AICOA are indicative of the challenges of shifting away from protecting consumers and toward an antitrust framework that somehow attempts to protect competitors. At that point, antitrust policy becomes more invasive, requiring regulators to define what forms of competition are acceptable, what is considered unfair and how larger companies must behave to accommodate smaller rivals. Not only are these issues difficult to resolve, but they also require a much greater degree of government oversight. Antitrust enforcers in the United States adopted the consumer welfare standard 50 years ago as a more workable standard for antitrust policy; abandoning that standard threatens to impose significant new burdens on consumers, businesses and innovation.

Image credit: tashatuvango

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