Antitrust Reform, Big Tech, and Innovation: A Word of Caution

Shun Iwamitsu

 

The current push for a major reform of U.S. antitrust law is stronger than it has been in recent decades.[1] The recent executive and legislative initiatives that aim to strengthen U.S. antitrust laws and its enforcement, many of which specifically target the technology sector,[2]embodies the growing concerns over the size, power, and influence that Big Tech[3] has captured and supposedly exploits.[4] In 2020, the focus on Big Tech took on new urgency with the arrival of the COVID-19 pandemic.[5] The rapid digital adoption caused by the constraints of the pandemic had underscored the significance of online platforms controlled by Big Tech, increasingly solidifying itself in society and the economy as the necessary “digital infrastructure” for the exchange of communications, information, and goods and services.[6]

The new antitrust movement catalyzed a debate over whether the current antitrust framework is ill-equipped to address transactions in digital markets, and advocates have generally pushed to replace the current consumer welfare standard that would allow antirust to account for a multitude of political, social, and moral goals, including the protection of small businesses, preservation of deconcentrated industry structure, and the promotion of fairness in economic dealings.[7] Some advocates have suggested a shift in how antitrust assesses anti-competitive behavior of large technology firms in light of its unconventional market power and market structure,[8] while others have even called for imposing market share caps to break up companies.[9]  However, the reemergence of what some characterize as the “big is bad” philosophy has not been without its critics; they argue that the current antitrust framework is sufficient in preventing anti-competitive transactions and that advocates fail to fully appreciate the unintended negative consequences the reform will have on the innovation ecosystem and ultimately the consumers.[10]

While disputes over the future of antitrust law continues, both sides of the debate generally seem to agree upon at least one matter; the facilitation of innovation is an important consideration for antitrust policy.[11] For example, the House Judiciary Committee’s antitrust report, which became the basis for the antitrust reform bills proposed in U.S. Congress, recommends a more activist approach for antitrust law and its enforcement in light of its findings that online platforms’ dominance has “eroded innovation and entrepreneurship in the U.S. economy[.]”[12]Senator Elizabeth Warren, who goes further by calling for a break-up of digital platforms, argued that U.S. antitrust has a long tradition of breaking up companies to ensure that they would not abuse their power by reducing innovation.[13]

Yet, it may be counterintuitive to learn that scholars and policymakers across the history of antitrust have predominantly believed that concentrated market power and monopolies produce more innovation than competition.[14] Innovation was also long thought to be the exclusive domain of intellectual property law, and since the patent system granted exclusionary rights and market power that antitrust was designed to prevent, it was thought to conflict and be incompatible with antitrust law.[15] Hence, unlike the common narrative that the goals of promoting competition and innovation are both naturally aligned, the relationship between antitrust and innovation is far from clear.

I. The History of Innovation in Antitrust

Only in the mid-twentieth century did debates over the possibility that antitrust may have the capacity to foster innovation in congruence with patent law gain momentum.[16] The theory that monopolies are better for innovation, a seminal perspective credited to Joseph Schumpeter, was the first to surface.[17] Schumpeter suggested that larger firms operating in concentrated markets may be more innovative due to the resources they have available for investing in long-term R&D projects and for hedging against failed efforts.[18] Schumpeter further suggested that larger firms have greater incentives to invest in R&D since a strong pre-existing market position can increase a firm’s ability to appropriate the benefits from innovation.[19] For instance, a larger firm can reap greater profits from an innovation if its benefits is in any way proportional to the firm’s scale of operation or market, while a concentrated market also mitigates the likelihood of competitors imitating the innovation and lowering its profitability.[20]

Only decades later did Kenneth Arrow introduce the competing perspective to Schumpeter, arguing that competition rather than monopoly promotes innovations.[21] Arrow explained that monopolists have less incentives to innovate than competitive firms because the market share and hence profits available to be gained through innovation–whether by lowering costs, improving quality, or creating new products–is far less for the monopolist than the competitive firm.[22]  Likewise, firms with existing products that already generate substantial profits will have less incentives to innovate and develop new products than new entrants; new entrants have no profits at risk from introducing new products as they have no existing products that would be eliminated as a result.[23] Therefore, according to Arrow, firms are only likely to innovate when their market power is threatened by innovative competitors, and market concentration will likely reduce innovation.[24]  

The “Schumpeter vs. Arrow” debate prompted many antitrust scholars, courts, and government agencies to consider antitrust as a means to preserve the market incentives to innovate,[25] but innovation did not become an explicit focus of antitrust litigation until the 1990s. Looking to the merger guidelines promulgated by the DOJ,[26] since its first issuance in 1968, innovation had not been explicitly referenced within the guidelines until their third revision in 1992.[27] Furthermore, although both the 1992 and 1997 revision explicitly mentioned innovation in their merger guidelines, they did nothing more than acknowledge the possibility that a merger could affect innovation.[28] Only in the 2010 revision did innovation receive meaningful treatment, having finally received its own section, “Innovation and Product Variety,” that fully addressed innovation both in the context of a merger’s potential anticompetitive harms and procompetitive effects.[29]

II. Innovation as a Goal of Antitrust

Innovation has become an increasingly important focus for antitrust, mostly in merger review, but also in conduct cases.[30] However, the value of promoting innovation through antitrust law has a short history in U.S. antitrust law and only recently seen proper recognition. Scholars generally do agree that a mix of exclusion and competition is needed for innovation to take place, but there is still not much that is known about antitrust’s influence on innovation.[31] The “Schumpeter vs. Arrow” debate is yet to be fully settled,[32] and despite the continued efforts by scholars to determine the optimal level of antitrust enforcement that best promote innovation and technological progress, there is still no clear answer and remains a hotly contested debate.[33]

Both sides of the current antitrust reform agree on the value of promoting innovation through antitrust law, but essentially disagree on the effective level of antitrust that would better promote innovation. While both sides will call for support under the cause of enhancing innovation, it is important to remember that there is no clear consensus on how much antitrust is effective for incentivizing innovation. To add to the lack of understanding, there have even been suggestions that Big Tech firms are unique in their ability to invest in R&D, and existing theories that apply to firms generally may not be perfectly applicable when characterizing Big Tech and their market incentives to innovate.[34] There obviously may still be valid political, social, or moral reasons that sufficiently justify the need for antitrust reform, but one should be cautious when encountering bold claims made on promoting innovation through antitrust law.

 

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[1] Anna Kertesz, US antitrust policy targets the technology sector, White & Case (Sep. 28, 2021), https://www.whitecase.com/publications/insight/taiwanese-investors-and-businesses/us-antitrust-policy-targets-technology-sector.

[2] Id.

[3] Big Tech primarily refers to the Big Four, consisting of Alphabet (Google’s holding company), Amazon, Apple, and Meta (formerly known as Facebook). See Chris Alcantara et al, How Big Tech got so big: Hundreds of acquisitions, Wash. Post (Apr. 21, 2021), https://www.washingtonpost.com/technology/interactive/2021/amazon-apple-facebook-google-acquisitions/. Big Tech can also refer to the Big Five, which joins Microsoft with the other four. See Conor Sen, The ‘Big Five” Could Destroy the Tech Ecosystem, Bloomberg (Nov. 15, 2017), https://www.bloomberg.com/opinion/articles/2017-11-15/the-big-five-could-destroy-the-tech-ecosystem.

[4] Subcommittee on Antitrust, Commercial and Administrative Law of the Committee on the Judiciary, Investigation of Competition in Digital Markets: Majority Staff Report and Recommendations (2020) at 7, https://judiciary.house.gov/uploadedfiles/competition_in_digital_markets.pdf [hereinafter Antitrust Subcommittee, Antitrust Report]; see John Ceccio & Christopher Mufarrige, Digital Platform Competition, Merger Control, and the Incentive to Innovate: Don’t Kill the Goose that Lays the Golden Egg, 30 No. 2 Competition: J. Antitrust, UCL & Privacy Sec. Cal. L. Assoc. 52, 58­–59 (2020).

[5] Antitrust Subcommittee, supra note 4, at 10–11.

[6] Id.

[7] Kertesz, supra note 1.

[8] Lina M. Khan, Amazon’s Antitrust Paradox, 126 Yale L. J. 710, 716–17 (2017).

[9] Ceccio & Mufarrige, supra note 4.

[10] See Kertesz, supra note 1; Ceccio & Mufarrige, supra note 4.

[11] See Kertesz, supra note 1; also see Tim Wu, Taking Innovation Seriously: Antitrust Enforcement If Innovation Mattered Most, 78 Antitrust L. J. 313, 313–14 (2012); Gregory Day, Innovative Antitrust and the Patent System, 96 Neb. L. Rev. 829–31 (2018).

[12] Antitrust Subcommittee, supra note 4, at 12.

[13] Elizabeth Warren, Here’s How We Can Break Up Big Tech (May 8, 2019), https://medium.com/@teamwarren/heres-how-we-can-break-up-big-tech-9ad9e0da324c.

[14] Day, supra note 11, at 835–37.

[15] Id.

[16] Id.

[17] Id.

[18] Richard J. Gilbert & Hillary Greene, Merging Innovation into Antitrust Agency Enforcement of the Clayton Act, 83 Geo. Wash. L. Rev. 1919, 1923–26 (2015).

[19] Id.

[20] Id.

[21] Id.

[22] Id.

[23] Id.

[24] Id.

[25] Day, supra note 11, at 835–37.

[26] Department of Justice’s Antitrust Division.

[27] Gilbert & Greene, supra note 18, at 1926–32.

[28] Id.

[29] Id.

[30] Howard A. Shelanski, Information, Innovation, and Competition Policy for the Internet, 161 U. Pa. L. Rev. 1663, 1669–70 (2013).

[31] Day, supra note 11, at 839.

[32] Joshua P. Zoffer, Short-Termism and Antitrust’s Innovation Paradox, 71 Stan. L. Rev. Online 308, 308 (2019).

[33] Day, supra note 11, at 839.

[34] Zoffer, supra note 32, at 311-14.