Antitrust and Innovation: What the Alarmists Get Wrong

Many technology industries are characterized by relatively high levels of industry concentration, with one or a few firms holding significant market share. This has sparked alarm in some regions, such as Europe, and among both progressive advocates on the left and populists on the right. Many are asserting that such concentration is anti-consumer and are calling for more aggressive antitrust enforcement, including limiting mergers and even breaking up large firms.

Yet, starting with the work of economist Joseph Schumpeter and building steadily in the last two decades, many antitrust scholars have shown that innovation industries have unique characteristics that lead to increased concentration—and moreover that, in many cases, the concentration helps consumers and spurs economic growth.

On October 26, 2017, the Information Technology and Innovation Foundation (ITIF) hosted an expert panel discussion on the ongoing policy debate about competition in innovative industries, including the latest research on the unique economics of innovation industries.

ITIF President Robert Atkinson began the event by emphasizing the value of innovation industries. To underscore his presentation, he explained how Brandeisian ideals are infiltrating the public conversation again. However, Atkinson believes that big businesses play a vital role in fostering innovation.

According to Atkinson, there are two types of innovation industries—research and development (R&D) industries and network-based industries. Though large R&D industries, such as Boeing, may seem invulnerable, Atkinson emphasized that they are not and can be threatened by new companies. He also noted that too much competition and antitrust intervention can hurt R&D, and thus, innovation. On the other hand, companies like Facebook and Twitter fall into the network-based industry category. According to Atkinson, the antitrust question shouldn’t be whether to break up Facebook into other social media sites, since they formed into big sites out of convenience to consumers. In other words, people like posting to one site, rather than to multiple variations of Facebook. In his view, the antitrust question should be: Do these companies have unfair market power to get advertisement revenue? According to Atkinson, the answer is no.

Following Atkinson, Carl Shapiro, a professor at the University of California at Berkeley, spoke on the public fear surrounding large companies today. He quoted multiple media outlets—including the New York Times and Economist—who have written negatively about the rise of big businesses. While he noted some problems with this rise, he offered several less-frightening explanations. First, there have been growing economies of scale. Second, consumers benefit when “giant” companies compete. Third, geographic consolidation of companies has increased efficiency. Fourth, globalization and declining trade barriers have enabled bigger companies, but consumers are still the big winners. Shapiro noted that today’s large tech companies warrant some scrutiny; however, he emphasized that antitrust can’t be used to attack dominant firms or as a substitute for regulation.

Howard Shelanski, a law professor at Georgetown University, shared his perspective on antitrust issues. For one, he does not believe that antitrust law necessitates many little companies. Rather, the country will still have large firms, but these firms will be successful because they deliver something new and valuable to consumers, as opposed to through unfair means.

In Shelanski’s view, neo-Brandeisians don’t necessarily deny the benefits of big business. However, they question the effects they are having on average consumers’ lives. In particular, many people view the large technology giants as making the average American less powerful. While Amazon may provide lower prices, individuals are losing control over who they deal with, the natures of the jobs they hold, and economic opportunity as a whole, as Shelanski explained it. To illustrate this, he talked about his cousins, who recently closed their hardware store after being put out of business by Amazon and other large companies. Like Shapiro, he does not think antitrust should be used as a regulatory tool. However, he does believe that antitrust officials should scrutinize companies when quick deregulation occurs.

John M. Yun, director of economic education at George Mason University’s Global Antitrust Institute, specifically addressed the implications of changing the antitrust standard. Prior to joining the Global Antitrust Institute, Yun worked as the assistant director in the Bureau of Economics of the U.S. Federal Trade Commission’s Antitrust Division, where he gained a lot of deeper insight into the practical effects of enforcement. He noted that today, larger firms do face more scrutiny than smaller ones. However, if the standard changes—even in just a marginal way—it will change how firms compete. While this may change “the order of the table” slightly and make the market less concentrated, Yun emphasized that there will still be winners and losers, and companies will continue to rent-seek.

Ultimately, the debate around antitrust action against large, innovative companies will likely continue for years to come, as evidenced by the public conversation surrounding the European Commission’s fine on Google in the summer of 2017. Hopefully, whatever solution is chosen in the future must advance the interests of consumers while still fostering innovation.

Follow the discussion on Twitter using the hashtag #ITIFantitrust.