UK Digital Competition Study Misses the Mark by Assuming Large Internet Platforms Require Stricter Antitrust Scrutiny

Joe Kennedy March 15, 2019
March 15, 2019

(Ed. Note: The “Innovation Fact of the Week” appears as a regular feature in each edition of ITIF’s weekly email newsletter. Sign up today.)

Policymakers around the world are grappling with the question of whether to increase regulation of large Internet companies. In the face of arguments that the digital nature of these companies makes them unique, governments have pressed for new rules regarding taxation, data protection, and antitrust policy. While a better understanding of digital markets is sorely needed, the thrust of these efforts too often has been to view companies as being too big, too entrenched, and too unaccountable, all justifying stricter regulation—or, as Sen. Elizabeth Warren proposed last week, being broken up.

The latest development in this movement was the release of a report written for the government of the United Kingdom by an expert panel that was led by Jason Furman, formerly head of President Obama’s Council of Economic Advisors. Although the report is carefully hedged and contains several sensible recommendations, its main impact will center around the call for the United Kingdom to take a more aggressive approach to antitrust enforcement against big Internet companies. As such, it is likely to provide momentum to those in the United States and Europe who advocate for a fundamentally different approach to antitrust than the one pursued over the last 40 years. These efforts would likely deter innovation, increase prices, and lower quality, all in a bid to protect competitors from “unfair” competition.

The Furman report correctly notes that market platforms like Google and Facebook raise unique challenges to traditional antitrust policy. For one thing, practices that normally violate competition rules, such as pricing below cost in one side of a market, can actually improve social welfare in the context of a platform if they attract a better balance of market participants on all sides of the market. Also, because of market efficiencies and network effects, these markets often have a tendency to be dominated by one or two companies, something Furman’s Council of Economic Advisors found in an earlier study. While acknowledging these facts, the new report claims that high market concentrations ultimately represent a danger to privacy, innovation, and competition. Yet its calls for stricter enforcement never get beyond generalities. In no case does the report clearly conclude that that past policy has mistakenly allowed a merger to go through, overlooked clearly anticompetitive behavior, or ignored a clear threat to innovation.

The Furman report first recommends the appointment of a new regulator who would work to increase competition in cases where a digital platform had “strategic market status.” The regulator would be charged with three goals: to negotiate accepted market rules; to encourage greater data portability and the use of open platforms; and to increase access to data by potential competing firms. The regulator would have the authority to impose rules if no agreement was forthcoming. Although the report acknowledges the risks of data capture, politicization, and a tendency to entrench market incumbents, it assumes that these will be successfully overcome. But it does not explain why we should believe that greater regulation will lead to greater innovation, or how the regulator can possibly know what market structure will enhance innovation.

Second, the report calls for stronger antitrust enforcement. A central argument is that the United Kingdom has never sought to stop an acquisition by one of the Internet giants despite hundreds of opportunities to do so. Yet each of these mergers was also examined by authorities in the United States and European Union. The fact that they both declined to challenge any of the mergers is likely a sign that the mergers did not represent a threat to competition, not that there was a failure of will. Of course, a merger that looks good when it is proposed could come to be seen as a mistake many years later. Yet the Furman report does not even try to point out an actual example where, in hindsight, regulators clearly failed.

When we look at details, the case for tougher antitrust enforcement is weak. Each of the prominent Internet companies faces fierce competition in at least some of their markets. Google and Facebook, for example, compete with each other and other online and traditional media for ad revenue. Meanwhile, users get free access to their platforms. Just as important, each of the five largest Internet companies spends heavily on research. The report points out that Amazon and Google rank first and second in terms of money spent. Microsoft and Apple are both in the top seven, and Facebook is 14th. So, it is hard to argue that their dominance is killing innovation.

Digital markets do raise antitrust concerns, just like all markets do. Yet we already have a well-established guide to how regulators should approach these problems. Under the consumer welfare standard, government policy should seek to prevent harm to other market participants, including consumers and competitors, because of a merger or unfair exercise of market power. The analysis of this question should be guided by a detailed investigation of the markets concerned, not a general aversion to bigness. Despite affirming its allegiance to the consumer welfare standard, the Furman report advocates policies that would loosen its restraint on regulators.

Digitalization impacts government policy in a large number of areas including tax, trade, privacy, and competition. That does not mean that the concerns it raises are unique or that existing rules are inadequate. Especially in competition policy, where regulators have a great deal of discretion and overzealous enforcement can easily deter innovation, policy should continue to be rooted in the tested consumer welfare standard and require convincing proof of competitive harm before regulators interfere. Finally, antitrust policy should not be extended to deal with unrelated issues such as privacy or economic inequality.