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Groupthink has always been the bane of sound public policy, never more so than now, as it has become widely that America has a competition problem. After years of dormancy, antitrust has become the topic of heated debates and the subject of a far-reaching reform effort. “Anti-monopoly” is now the solution de jour for all that ails the U.S. economy, just as it was in the early New Deal.
That latest example of this trend is the “Competition and Antitrust Law Enforcement Reform Act” (or “CALERA”), introduced by Sen. Amy Klobuchar (D-MN), chair of the Senate Judiciary Committee’s Subcommittee on Competition Policy, Antitrust, and Consumer Rights, in an effort to “better protect competition in the American economy.” Following the House Antitrust Subcommittee’s sweeping report on its investigation of competition in digital markets, where the tech companies were accused of engaging in sundry forms of anticompetitive conduct, CALERA endorses the belief, endorsed by self-proclaimed antitrust populists, that large tech companies stifle innovation. Markets are too concentrated, there is insufficient innovation, and competition has disappeared because monopolies have come to the fore, not just in tech but across the economy—or so the argument goes.
This narrative underlines CALERA, which seeks more vigorous antitrust enforcement and seeks to revamp the century-old antitrust rules. To the bill’s credit, it bolsters the resources available to the Federal Trade Commission and the Justice Department’s Antitrust Division, so they can more effectively investigate anti-competitive conduct. It also ensures there is a level playing field by not discriminating between digital and non-digital companies, thus aiming to cover the entire U.S. economy. This differentiates the bill from the European Digital Markets Act, which regulates competition issues for digital companies only.
The Klobuchar bill expands the categories of unlawful acquisitions by large companies of small companies. It expands the range of exclusionary conduct by dominant companies. The protection of competition justifies stricter antitrust enforcement. But the problem is that CALERA would likely reduce innovation, slowing economic growth and making consumers worse off.
To prohibit virtually all acquisitions of start-ups by large tech companies overlooks the possible innovation rationales for these transactions. For start-ups to grow and gain the necessary scale, access to venture capital has been dwindling and banks are increasingly risk-averse, so many of them develop by external growth—namely acquisitions by larger companies. Moreover, acquisitions constitute great opportunities for synergies at a time where product differentiation and service complementarity are more critical than ever to commercial successes. The bill creates the possibility to retrospectively undo previous mergers. This would considerably raise risk costs associated with such legal uncertainty, thereby deterring innovation and commercial transactions.
Fundamentally, the bill posits that competition generates innovation, but a long tradition in economics, popularized by noted innovation economist Joseph Schumpeter holds that it is actually market power that powers innovation by enabling companies to reap enough rewards to invest in risky next-generation innovation. This is why we see little innovation in industries where margins are low. Innovation generates vigorous competition. This is what Schumpeter called “creative destruction.” Economic evidence is both ignored and compromised in CALERA.
Should we promote competition with a textbook reference to “perfect competition”? Not only is perfect competition unreachable and undesirable, but “imperfect competition” where firms acquire a certain size is beneficial to economic competitiveness and worker and consumer welfare. Bigness should not be cursed but praised in times of globalization.
Unfortunately, CALERA wishes to shift the debate from “antitrust law” to “competition law” in an unequivocal inspiration from the European-style competition. The European tradition remains influenced by German Ordoliberalism, which advocates the flawed idea of “perfect competition” at the expense of innovation. This inadequate philosophy should not be transposed to U.S. antitrust enforcement as it does not correspond to the characteristics of the U.S. economy.
CALERA also returns to discredited structure-based presumptions of anti-competitiveness: one firm, or a group of firms holding 50 percent of market share will be presumed to harm competition whenever their conduct will, say, disadvantage an actual or potential competitor. After having disparaged “flawed assumptions” advocated by economists for decades, CALERA excavates old assumptions that a firm with a large market share is presumed to be harming competition only because of its conduct of business “disadvantages” a rival. This implies the following command: “Thou shall not innovate, anymore—otherwise, laggard firms will be harmed!” Innovation deterrence reaches its climax. Competition through innovation deteriorates for the sake of “preserving competition.”
CALERA would inevitably harm long-term competition and innovation under the veil of protecting competition in the short run. Ironically, “CALERA,” in French, means “it shall stall.” To be sure, with CALERA, American innovation shall stall. Let’s hope the Democrats’ reform effort evolves as the legislative process progresses.