Podcast: Dynamic Antitrust Policy in the Digital Era, With Aurelien Portuese

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When it comes to the innovation economy, there is no hotter issue these days than antitrust. Technology companies, in particular, are on the firing line as an increasingly vocal populist movement seeks to refashion late 19th century antitrust laws to guard against monopoly power and slow down disruptive innovation in the digital era. In these conditions, there is a risk that the so-called “precautionary principle” will take hold at the expense of economic dynamism. Rob and Jackie parse the debate and weigh the best options for policymakers with Aurelien Portuese, ITIF’s director of antitrust and innovation policy.

 

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Rob Atkinson: Welcome to Innovation Files. I’m Rob Atkinson, Founder and President of the Information Technology and Innovation Foundation. We’re a DC-based think tank that works on technology policy.

Jackie Whisman: And I’m Jackie Whisman. I handle Outreach at ITIF, which I’m proud to say is the world’s top ranked think tank for science and technology policy.

Rob Atkinson: This podcast is about the kinds of issues we cover at ITIF in the broad economics of innovation to specific policy and regulatory questions about new technologies. There’s probably no policy issue or a policy question that’s more front and center now, when we’re talking about the innovation economy than antitrust. Technology companies and just companies overall now are in the firing line, if you will, on antitrust concerns, not just here in America, but really in Europe, in particular and other countries. So we’re going to talk about that today.

Jackie Whisman: Our guest is Aurelien Portuese, who recently joined ITIF as Director of Antitrust and Innovation Policy. He’s also an adjunct professor of law at the Global Antitrust Institute of George Mason University and at the Catholic University of Paris. And his book, Antitrust Populism: Competition Policy in the Digital Era will be published later this year by Oxford University Press. Hello.

Aurelien Portuese: Hello. Thanks for having me.

Jackie Whisman: Thanks for being here. So maybe we’ll start off, tell us what is antitrust and why does it matter?

Aurelien Portuese: Well, I think antitrust is a very important area of law that determines the rules of the game for enterprise in America. These are very old laws because they were first enshrined in 1890 and they basically said, what firms can do and cannot do. Even if, sometime they enter into some mutually accepted contract, some contract may go against some public policy provisions and the lawmakers or the judges may consider those contract as being against the interest of either the consumers or innovation and the number of interests that are determined by the judges themselves.

Rob Atkinson: Yeah. So antitrust law, it’s not like other fields of law where there’s bright red lines. There’s laws around, for example, terrorism or financial fraud. Relatively bright red lines, you’re either on one side or the other. If you’re on the wrong side, you go to jail or you get a fine. Antitrust, even if you look at the original statute, the Sherman Act, it’s very vague, what is anti-competitive behavior? What is monopolization? Can you talk a little bit about why that makes things complicated? And also, it leads to why there are these trends in antitrust, one side going one way for a while, and now we’re in this other period, it seems like this emerging period. What’s going on there?

Aurelien Portuese: That’s exactly the case. These rules of antitrust are purposely vague. They are made vague because some say that antitrust is a bit like the economic constitution of America. It says how firms should behave, but it says in a very large and broad terms. So the question is, what do you put behind those terms such as anti-competitive behavior? And what is fascinating with antitrust is precisely it’s vagueness. And it’s more about a gray zone than red lines, as you just said. And in order to clarify antitrust and how it’s applied, economics and economies of innovation can shed lots of light on how to understand the enforcement of antitrust law. So these rules are very broad, very vague, and they need to be applied on a case-by-case basis by the court with the help of economics, in order to understand what these rules mean for a specific firm or a specific period of time.

And you’re completely right. There has been tensions. I mean, just to sum up very simply, those tensions, there are two tensions. When those antitrust laws were adopted late 19th century, there was a populism that was underlying. There was a populist party in America in the late 19th century and out of these populist tensions, which were made mostly by farmers, there was this very anti-corporate power, anti-cooperate cooperation that led to the passage of the Sherman Act. That’s one tension, which goes against bigness, against large corporate power.

And the other point of view is to precisely say that we need to clarify antitrust with the help of economics. We need to rationalize antitrust. We need to try to have some objective standards in order to enforce antitrust. And so this goes against the populist view in order to clarify, objectivize the enforcement of antitrust. And if you look for more than a century of antitrust enforcement, there always had been some tensions and pendulum swing between the populist version of antitrust, which goes against bigness without a full consideration of efficiencies of economics analysis and the real, or at least the profoundly economic approach to antitrust, which only focus on efficiency and those matters. And this is also the beauty of antitrust. The debate is ongoing, and I think those days you cannot miss this debate.

Rob Atkinson: I wrote a piece for American Compass recently, arguing that there’s three sort of frames for economics. There’s sort of the market-oriented free market tends to be oriented to the right. There’s the emergent sort of, if you will, redistributionist argument from the left and then there’s something in the middle, which is really around pushing for growth and innovation and a stronger economy and higher state living standards. And what I see today is that that part of the left, the sort of populist left, which is really focusing on redistribution has taken antitrust as a core component of their agenda, their toolbox. They see antitrust as a way to advance redistribution. Even though I think that’s faulty, we can talk about that, why I don’t think that’s going to happen.

But it’s very different than an antitrust focused on how do we make consumers’ lives better? How do we improve living standards? And that to me is kind of a very important question. What do you want? Like a lot of the populist say, we don’t like Amazon or even Walmart because they’re big and because they take market share away from maybe some mom and pops here and there. But I got to tell you, I love going to Home Depot. It has so much more variety than we used to have at my local hardware store. And I save money like going to Amazon. So can you say a little bit more about that? How much of this is really about what it is we want as a society?

Aurelien Portuese: Exactly. I think the way you enforce antitrust, the way you see antitrust would completely determine American capitalism, and the way you see enterprise to operate in the market. If we put this kind of on-time market concentration objective to antitrust, then you will pursue as the new populist would argue, and you just rightly framed. You would pursue the concentration at all costs, at any cost, right? So if you put your criterion as the size and as the small and locally-owned businesses, which is the objective on antitrust and it’s possible, because again, it comes from populist origins. And so the provisions are so vague that they can put these objectives, but this comes with a major cost and it becomes against efficiency and innovation. Other approach is, of course, to focus only on efficiency and consumer price and say that antitrust should be about lowering the prices.

And I think there has been also on that part from the economic side, perhaps an exaggerated focus on lowering of price. We see, as you just rightly say, we see in our today’s life that firms compete not strictly and simply over prices, but they compete over quality and also price considerations, sometimes it’s very, very far in the entrepreneur mindset, the capacity for them to recoup and to make profits in an economy where the digital platforms can be very far away.

And so the criterion of price has perhaps been overstated, and what is important, what we may think is a dynamic view to competition. A dynamic view to competition would be very, very different in a sense that it will not focus on de-concentrating the economy at any cost. It will not focus simply and merely on price, but it will focus clearly on spurring innovation, protecting productivity, and ensuring of course, that consumer welfare is protected, but this comes with a longer view of competition. And that is a very different approach, which is not dominant those days, because those days dominated by a new antitrust populism that reverts back to the old populism that we had in the late 19th century.

Jackie Whisman: You’ve said that antitrust laws increasingly foster risk-averse attitudes. And ITIF has written about this so-called precautionary principle, which is well-known in environmental or medical laws. And that’s how we wrote about it. But now it’s really entered this antitrust conversation. Can you explain what the principle means and what it implies for antitrust?

Aurelien Portuese: Yes, of course. What is very interesting is that firms compete with innovation. They compete disruptively and they compete in a way that sometimes lawmakers and regulators don’t understand also that the laws and regulations were not made for these kind of disruptive innovations. So disruptive innovations may lead to very original, if not unique business behavior that could be seen not as innovation, but as anti-competitive behavior. And you see that novel behavior, novel competitive behavior are increasingly seen with greater skepticism and with greater reluctance, because there could be some anti-competitive behavior.

Just to give you an example, a very clear example between business model. I mean, we know that in terms of traditional business model, you as a firm, you charge your consumer a price, but there’s a new business model that is growing and you can’t miss is the ad-funded business model where you increasingly see that a number of services and products that we have are free of charge because they are funded by advertisement. And this completely revolutionized the way we need to think about antitrust enforcement. And I mean, sadly enough, I think the regulators and lawmakers don’t want to rethink the way antitrust is being enforced and take increasingly risk-averse position.

Let me tell you why. I mean, there’s an overall consensus by the fact that not only antitrust has been underenforced, but also the argument goes that antitrust enforcement is too long, right? If you want to sue a company, that will take years before you go to court. The precautionary antitrust we described is that even before anti-competitive behavior occurs, even if there is no harm to consumers, then regulator need to step in to prevent these competitive behavior to occur. And this is a precautionary because it intervenes before the harm has ever occurred. And this is very, very different because you set the rules of the game before the behavior occur.

For example, in the European Union, you can see that the precautionary measure to competition rules are increasingly adopted under, let’s say interim measures so that you can force a company to do a number of things even before a trial is put, but also the regulatory shift so that antitrust has failed and we should resort more and more to regulatory framework as opposed to a judge-made law and judicial enforcement of antitrust. I think this change of practice from an exposed antitrust liability to a more exempted regulatory framework, change a lot of things in the way we see innovation and may stifle innovation because firms may be prevented from engaging into some behaviors which may be competitive, but are prevented even before any kind of harm may occur for consumers.

Rob Atkinson: One of the things I think that probably most people who don’t study this maybe fail to understand, and it’s partly because of the antimonop... —I love that term, antimonopolist—I mean, everybody’s an anti-monopolist... You’d have to be an idiot, not to be an anti-monopolist. Problem is none of these are monopolies. They’re in competitive markets and maybe a little more concentrated. The problem is though, what folks don’t understand is the goal of the quote, anti-monopolists is really about protecting smaller businesses and breaking up big businesses because they just simply have an animus towards large businesses. They think that a society in which there are large corporations, even though more than half of Americans work for large organizations today, I mean, most Americans work for larger organizations. They see that as simply a problematic one.

And so one of the things they don’t like about creative destruction or innovation is it’s oftentimes firms that are either small and use innovation to get big or big firms that use innovation. And they don’t really like that. I mean, look at the last 20 years in terms of retail, there are a lot fewer retailers because you’ve had economies of scale. I mentioned Home Depot before, hardware stores. There used to be a hardware store on every corner it seemed like. The problem was they didn’t have much selection and they had high prices. And then you had Home Depot and Lowe’s in the US and companies like that. And yeah, same thing in retail.

So these advocates, they really don’t want disruption. They want a society that’s very stable, no change, nobody ever loses their job. And look, frankly, I’ve lost my job before from an organization that was eliminated by Congress. I understand how painful that is, but if we don’t have a society where there’s constant sort of change and innovation, we’re going to be stagnant, our kids’ lives are going to be the same, if not worse than our lives. Why do we want that?

Aurelien Portuese: That’s totally the point for antitrust challenge today. Innovation is costly. It requires a lot of capital. And in order to be disruptive, you need some sort of capital and some sort of scale in order to be disruptive. And you’ll agree that some in antitrust just dislike the very fact that large companies may be disruptive and may in itself disrupt for the sake of consumers and for the sake of innovations, because disruption will harm competitors. And that’s the very process of competition. So there cannot be innovation without harm. There will be harm. And the harm is always on the innovation laggards, right?

And so the question is to what extent antitrust should intervene to reduce the breadth, the frequency, and the extent of innovation? And that is a very complex topic. And I think when I say that regulators and lawmakers may err on the side of creating too much of a risk aversion is that they take a very skeptical view, which is reveal, as you just said, by anti-bigness. If innovation comes from large companies that disrupt competitors, then there is a anti-bigness prejudice, which may prevent this innovation to take place, even if these large company are disruptors in traditional businesses. If you look at, for example, a number of company may disrupt traditional businesses, from Airbnb disrupting the hotel industry or Uber disrupting the taxi drivers.

Rob Atkinson: So I think that’s a really important point because we should make it clear that ITIF is for innovation disruption, not protection of companies, whether they’re big or small. And so there can be cases where large companies use their power to restrict innovation from a small firm or another big firm. And that’s what economists or antitrust scholars would call a conduct issue. They’re using some kind of unfair conduct to limit competition. Generally, we’re opposed to that because it harms innovation, but we’re not opposed to our companies just being able to innovate. And if that hurts other companies, so be it, as long as it’s good for innovation.

Aurelien Portuese: There’s one thing where we should all agree. And I think it’s just completely overlooked in antitrust. And that’s the purpose of antitrust is the fight against cartel. I mean, there’s so much effort put on unilateral conduct and there’s an overlook of the fight of cartel. I think antitrust should focus on fighting against cartel, against conspiracy, which truly harm consumers. When it comes to unilateral conduct by firms which have reached some market power, I think you’re right, we need to be very cautious in a sense that most of the behaviors that we may not understand may not necessarily be anti-competitive behavior, may be novel behavior, original behavior that portray disruptive innovation. So we cannot, and we should not insulate inefficient competitors from the competitive process. That is something very important.

And I think we should ensure that these competitors that are excluded or foreclosed from the competitive process are as efficient as the company that foreclosed them, so that we can ensure efficiency and we can ensure that innovation and consumers are not harmed. This is what we call in the antitrust, the as efficient rival test, just to make sure that if you’re kicked off the market, because you’re less efficient, that is not, and that should not be an antitrust concern.

Rob Atkinson: One of the challenges also is, although I think antitrust authorities are getting better, historically, they have really looked at markets in a very sort of static way. And when you look at some of the more important antitrust cases, you see that. For example, the breakup of AT&T in the ‘80s, that was because they had a monopoly in long distance, supposedly. Anybody make a quote, long distance call anymore? I mean, I don’t. There’s no such thing as a long distance call. I use my cell phone-

Aurelien Portuese: Innovation-disrupted long distance. Yeah.

Rob Atkinson: Yeah, exactly. I mean, we’re on a long distance call right now, Aurelien. You’re in France. Similar with Kodak, the antitrust case against Kodak because of their monopoly in chemical film. Well, that didn’t last very many years after that. Microsoft, the same thing. So there’s this enormous amount of technological disruption that serves almost like an antitrust tool in and of itself.

Aurelien Portuese: Right. And I think that’s very important to mention that it’s very important to understand why firms innovate. Most of the time, they innovate out of competitive pressure. And I think antitrust enforcers should be really aware of the fact that clearly you have innovation because there’s a competitive threat, right? So I think there cannot be so much of innovation if we’re talking about to some sort of monopolies, of a company that is completely insulated from the competitive process.

And I think the textbook model of monopoly, that single seller that enjoys massive rants completely insulated from the competitive process, we rarely, if ever, see that in reality. And I think what is problematic is that antitrust enforcers still have in their mind this ideal view of perfect competition. So everything in reality looks like imperfect competition and antitrust interventions is deemed to reach that level of perfect competition that only exists in textbook and that is never lived in reality.

So I think if we want to have, as you just said, the longer view, the more dynamic view of competition, it’s very important to understand that the premises and the assumptions that we’ve had about the market economy, I mean, they were theoretical assumptions that were never deemed to be realistic. And I think it’s very important to have antitrust enforcement and antitrust interventions in the real world. What kind of world are we talking about? And just to talk about, let’s say digital companies, their reality, their business model is completely different than the traditional business model. And so if we apply some sort of theoretical and realistic model to real situations, we may very well err on the side of precaution. We intervene just for the sake of precluding innovative companies to innovate.

Jackie Whisman: Well, it seems clear that antitrust will remain a priority for lawmakers in the months and probably years to come. What recommendations would you make to improve antitrust laws or maybe more importantly, how to improve their enforcement?

Aurelien Portuese: Yeah. I think there’s a lot of discussion on Capitol Hill about antitrust reforms. The fact that antitrust need to be reformed, I think it’s kind of inevitable. So what kind of antitrust reform can we suggest? First of all, because of the complexity of what we’re talking about and the need to have the resources to look at each and every company, I think the proposals that we see and we hear about an increase of resources of the Federal Trade Commission, I think these are healthy and desirable proposals because the complexity has increased so much and is disconnected with the capabilities of the Federal Trade Commission. So it’s important to have these increased resources.

Also, we need to focus, as I said on cartels and conspiracy. I think we completely overlook the cost to consumers, to American families and the cost to innovation as well to existing cartels in traditional businesses. I mean, antitrust is completely focused on digital companies and tech sectors, might be perhaps because it’s more attractive and create some immediate headlines. But I think a lot of traditional sectors are still under conspiracy and cartels that should deserve some greater focus by antitrust enforcement. Also, the fact that you have horizontal mergers that may lead to complex issues, I think it’s fair to say that horizontal mergers may have a larger scrutiny, but it doesn’t mean that there should be some presumptions or systematic prohibitions.

And final point is to fully, perhaps in the law to engrain antitrust in an innovation-based perspective. It means that we need to have a timeline of analysis, which is no longer two years or three years as we currently do, but we need to have a timeline over five years or even more in order to embrace a longer view, a longer term perspective of antitrust enforcement and to also better understand the competitive framework. So these are the kind of reforms we advocate at ITIF and we should have the US Congress being more keen to adapt.

Rob Atkinson: Well, that’s great. Thanks so much for being here, Aurelien. Really, really appreciate that. And I encourage our listeners to go on our website and check out Aurelien’s work. He just joined ITIF early this year. So thank you.

Aurelien Portuese: Thank you very much.

Jackie Whisman: And that is it for this week. If you liked it, please be sure to rate us and subscribe. Feel free to email show ideas or questions to [email protected]. You can find the show notes and sign up for our weekly email newsletter on our website, itif.org. Follow us on Twitter, Facebook and LinkedIn @ITIFdc.

Rob Atkinson: We have more episodes and great guests lined up. New episodes drop every other Monday. So, we’re hoping you’ll continue to tune in.

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Podcast: Dynamic Antitrust Policy in the Digital Era, With Aurelien Portuese