Big Tech Controversy Part 1: Antitrust and the Consumer Welfare Standard
Big Technology companies, such as Amazon, Google, Apple, and Facebook, have grown to substantial prominence in the United States, as evidenced by the overwhelming popularity of the iPhone to the ubiquity of two-day shipping with Amazon Prime. Big Tech has brought innovation and convenience to society and has increased accessibility to news, information, and entertainment. It has allowed society to reach new heights that were once unimaginable. However, within the last year, Big Tech has been subject to increased scrutiny from lawmakers in the House of Representatives and from officials in the Department of Justice, by whom they are accused of excessive market power and monopolistic status [1]. This has raised questions about the strength of current antitrust laws and the effectiveness of the court’s Consumer Welfare Standard.
It is first important to acknowledge that Big Tech companies are different than past monopolies in three key aspects:
They have not destroyed markets, but have, rather, created new ones [2]. However, this has given Big Tech considerable power to act as “gatekeepers” for these markets. Apple, for example, runs a market for applications for their devices, which they monitor. They pose a steep barrier to entry since a developer of an app must give 30% of their profits to Apple if they want it in Apple’s App Store [3].
They collect data on consumers constantly. Google, with a day of normal internet use on an Android device, collected a whopping 11.6 MB of user data [4]. This includes information on what websites were accessed, what videos were watched, personal information (such as a person’s name and birthday), and even a person’s current and past locations [5].
They have the capacity to censor information, including news and certain websites. For example, Twitter censured an article by the New York Post and even blocked access to the White House Press Secretary’s personal account where she had retweeted that article [6].
This present article will address the economic concerns posed by Big Tech companies, which corresponds to the first aspect listed above. A subsequent post will discuss the second and third aspects, which relate to Civil Liberties.
The issue of Antitrust laws arose in the mid to late 19th century, when the business landscape consisted of oil barons and railroad tycoons who monopolized their respective industries. Two important laws came out of this period, the Sherman Act of 1860 and the Clayton Act of 1914. These laws essentially banned monopolistic activities in firms or cartels, including naked price fixing agreements (essentially the agreements creating these cartels) and mergers and acquisitions that would severely limit competition [7].
The most important aspect of these pieces of legislation is that they relied on the court to determine whether a firm was actually in violation of these laws. As a result, many philosophies have developed on how to determine if a company or cartel is in violation of antitrust laws. The prevailing principle today is the Consumer Welfare Standard. The main goal of this philosophy is to allow for the maximization of output (including quantity of the good or service, innovation, and quality). Price is not used due to the variety of factors that contribute to a lower price; monopoly could be the cause, or the cause could be increased efficiency. Monopolistic firms, aiming to maximize their profit, increase the prices of goods and decrease output, so relying on price to indicate consumer welfare penalizes firms whose production is less than ideal in a free, competitive market. This increases consumer welfare, but while doing this, also helps producers. The use of the word “consumer” in the Consumer Welfare Standard is misleading, since this standard improves not only the welfare of traditional consumers, but also of producers, particularly those who engage in trade with and purchase items from other producers [8].
The Consumer Welfare Standard also gives the court the necessary legal metrics to conduct a fair, consistent trial. It uses the same metric, output, to judge every case and requires the defendant, the firm, to present evidence on its behalf. For a defendant to be proclaimed guilty of violating antitrust laws, there must be empirical evidence of reduced competition against them that shows that they are actually engaging in this illicit activity [9]. This is key to keeping the rule of law constant and unambiguous, ensuring equality under the law for every person or firm, no matter the situation.
Due to the emergence and substantial growth of Big Tech, the Consumer Welfare Standard has garnered some criticism, and, as a result, a new, populist antitrust movement has emerged, the Neo-Brandeis movement. Proponents of this philosophy believe that markets are fragile and are easily prone to market failure and present many opportunities for monopolistic activity, so they believe large companies should be broken up into many smaller firms. This is driven by political rather than economic philosophy, since Neo-Brandeis thought is wary of large corporate power influencing the Democratic political process [10].
Although these are legitimate concerns, there are significant flaws in Neo-Brandeis thought. First, it advocates for a competitive market with many small firms, which in principle is a good idea, but this results in higher prices for consumers. It is important to note that large firms are not always engaged in anticompetitive behavior but that the size and success of these firms could instead be attributed to economic efficiency [11]. Therefore, this would decrease consumer welfare and increase that of producers. Also, it is difficult to apply in legal scenarios. Since this philosophy has so many variables, and is influenced by not only economics but also political thought, it is hard to execute in a courtroom. A ruling would rely too heavily on the individual biases of the judges and not enough on empirical evidence or the rule of law. Antitrust laws are a solely economic concept meant to increase competition, so if other extraneous elements are thrown in, it just muddles the case against a given firm, making rulings variable and ambiguous.
The Consumer Welfare Standard is by far the best principle for judging whether a firm is engaging in anticompetitive activity, but it is by no means perfect. Some practices that harm consumers are still allowed by this standard including predatory pricing, through which a company lowers its prices to drive competitors from the market, and tacit collusion, an implicit agreement between two firms, particularly with regards to pricing [12]. Additionally, the Consumer Welfare Standard was designed only to deal with economic issues, specifically those relating to market competition, so it is unable to solve any other problems firms may cause such as, in the case of Big Tech companies, infringement of Civil Liberties. But the beauty of the Consumer Welfare Standard is that it has the ability to evolve to be applied to current legal situations, even with Big Tech firms and their novel business structures and practices. In fact, the Federal Trade Commission just released Vertical Mergers Guidelines, giving the Consumer Welfare Standard more power to prosecute vertical monopolies instead of solely the traditional horizontal monopoly [13]. This occurred likely as a result of market concentration by companies such as Amazon and Google. By giving the Consumer Welfare Standard more powers, this makes it even more effective in preventing unfair competition and monopolistic activity. The Consumer Welfare Standard is the ideal judicial metric for antitrust suits since it is measurable, empirical, applicable in a court of law, and protects consumers from the troubles that come from both lack of competition and lack of efficiency.
David Vojtaskovic is a current first-year who plans on studying Economics. He is a Staff Writer for the Law Review's Blog and can be reached at david_vojtaskovic@brown.edu.