Antitrust 101 with Ryan Young
How to Stop Left and Right from Colluding to Bring Back Old-Fashioned Antitrust Regulation
At this point it’s fairly clear that “Big Tech” companies like Google, Apple and Twitter are in the tank for the Democrats. However, their bias poses no serious obstacle to staying informed as long as you diversify your news sources and listen to independent shows like this one.
There’s no great threat to competition in the market for news and information — to the contrary, the internet has given us more options than we could have dreamed of.
Trump meanwhile is threatening to regulate his political enemies in tech like public utilities. Whether he realizes it or not, this puts him in league with some of the leading figures of the Progressive Era — like Supreme Court Justice Louis Brandeis. Brandeis set the precedent that led to a “Big-is-Bad” mentality of Antitrust enforcement, which persisted well into the 20th century, and is now rearing its ugly head once again.
Ryan Young, a senior fellow at the Competitive Enterprise Institute, is at the frontlines of the antitrust issue. He’s noted the worrisome confluence (dare I say collusion?) between Democrats like Elizabeth Warren and Republicans like Trump when it comes to the issue of regulating free markets in the name of “competition.”
He observes that this Orwellian notion tends to find support during periods of rising populism — such as today — despite the FTC’s abysmal track record of policing anti-competitive practices for the so-called “public interest.” Instead, the Department of Justice’s anti-trust division and the FTC have colluded with one another to maximize their own budgets while stifling innovation and creating an entire cottage industry in Washington D.C. for Microsoft lobbyists.
Young has a new, must-read series of blog posts explaining the flaws of antitrust regulation, as well as a paper titled “The Case Against Antitrust” [view Full Document as PDF]. We’ll break the topic down to basics this Sunday on the show of ideas, including the paradox of antitrust — namely that no monopoly can survive for long without favorable treatment from the government (often in the form of previous antitrust provisions).
For the wonks, I recommend checking out CEI’s Antitrust Skeptic’s Bibliography. Otherwise, listen now to my interview and get everything you need to know about antitrust regulation with the expert, Ryan Young.
Or read the transcript:
Big Tech: A New Wave of Antitrust
Bob Zadek: Welcome to The Bob Zadek Show.
This morning’s show ought to be subtitled, “What the heck took me so long?”
What the heck took me so long to invite this morning’s guest to share with us his wisdom? I’m happy to welcome to the show Ryan Young. Ryan is a senior fellow at the Competitive Enterprise Institute, also known as CEI. He researches regulatory reform, trade policy, and antitrust regulation. He used to host the CEI podcast and he writes a popular series for the CEI staff’s blog called Ridiculous Regulations.
He is a trained economist with a Masters in Economics at George Mason University and a BA in History from Lawrence University. He worked at Cato before joining CEI. This morning we’re going to examine a topic that I cannot believe took me so long to discuss on my show, which is the subject of antitrust regulation. This has become the tool de jure of the left, who seek to accomplish a dramatic change in our entire economic system. When you want to effect a profound economic change, you dust off all of the tools in your governmental toolbox.
Antitrust regulation is a blunt tool that keeps on popping up.
It is a blunt edged instrument and is very effective if you want to destroy the market system. We’re going to discuss this morning whether Amazon, Facebook, and other Big Tech companies are bad.
Is big bad? Is big good? Is big neutral? Does it make a difference?
You must understand the economics and the politics of antitrust legislation in order to follow the economic debate which will take place during the upcoming presidential election. Ryan, welcome to the show this morning.
Ryan Young: Thanks so much for having me on Bob.
Origins of Antitrust Legislation: Sherman and Clayton Acts
Bob Zadek: Now of course there is nothing in our Constitution that invites government to use the powers of legislation to affect economic transactions between consenting adults in the marketplace. And for the first hundred years of our life as a country, there was no real discussion that sounded like, “Woe is us, woe is us. We have big companies selling us goods and services.” It all changed during a very particular political era — the end of the 19th century.
Tell us about antitrust legislation. What does the Sherman Act and the Clayton Act and other federal legislation target? What did it attempt to do when it was enacted around the very end of the 19th century?
Ryan Young: The timing is very important because for a time leading up to that monopolies were very rare. Essentially governments supported trade organizations like the Dutch East India company. They didn’t seem to be worth studying because if they weren’t propped up by government they would simply go away. They weren’t seen as a threat to larger market processes. This changed in the 19th century when you had the rise of Standard Oil, Carnegie Steel, big railroads, and big banks. That frightened a lot of people. Other companies saw it as a very lucrative regulatory weapon.
Beginning in the late 1880s, some states came together at the behest of certain special interests, and passed their own antitrust laws that could be used as barriers to entry for new firms or to advantage incumbent firms to protect their privileged positions. By 1890, this sentiment had reached the federal level, and we got the Sherman Antitrust Act, which is still enforced today. This is becoming a big battle. The environment is being pretty restrained right now but people on both the left and on the right are pushing for an antitrust revival. That is going to be a very important issue over the next several years.
Bob Zadek: Now, when companies got to be larger than they were historically, companies not propped up by government, you said it frightened people. Why should the size of a company frighten somebody? And I’m not talking about any company large or small, which operates in a way that harms its customers. We’re putting aside bad actions and bad actors. We’re talking about “bigness” per se. Why should that “per se” be scary to anybody?
Ryan Young: Because concentrated power is a terrible thing. The whole American Revolution and the whole general liberal project of the last two, three, or 400 years has all been about reacting against absolute centralized authority.
And while our current political situation has largely accomplished that in the political realm, this was new in the private realm in the late 19th century. People saw this same pattern that they had seen among kings and monarchs reemerging in the form of robber barons. Fortunately, these fears turned out to be overblown, but that was what the popular mind was thinking at the time.
What Exactly is a “Monopoly?”
Bob Zadek: Standard Oil and the railroads are the poster children for robber barons. They became monopolies because the government made them monopolies. They not only operated with the government’s blessing, but they were protected in many ways. So, railroads became monopolies because the government gave them that monopoly power. Standard Oil of course was different. They became a monopoly by dint of the cleverness of their business model. Rockefeller and others simply grew because they were good at what they did.
Now, two comments, we are talking about monopoly. The word “monopoly,” which is in the statute of the Sherman Act of 1890, is kind of a squirrely word. It’s in the statute and the enforcers are to use the statute to beat down monopolies, without a lot of guidance at what that word means. What exactly is the monopoly that is evil? What are we talking about?
Ryan Young:That is an excellent question. The Sherman Act, unlike a lot of modern legislation, is two pages long. I appreciate the brevity. It’s wonderful. But at the same time, in two pages they don’t define what they actually mean by monopoly, and this is still a source of confusion 130 years later. An economist will say that a monopoly is where you have a company that’s powerful enough to where it can lower its supply and raise its prices. So, they can make that product harder to get and more expensive, which harms consumers. That is usually what people mean when they say “monopoly.”
However, economists are not in charge of antitrust policy. It’s usually judges who are interpreting law by deciding cases, and they decided what monopoly was based on whatever they wanted. This is called the “rule of reason” standard, where they essentially use any definition of the term monopoly they find reasonable, and this changes from case to case. There is no bright line standard for what constitutes a monopoly for legal purposes. This creates a great deal of uncertainty. A company often has no idea of knowing whether it’s in trouble or not and it can’t plan for the future or create long-term investments if it has any fear of a possible antitrust action.
Bob Zadek:Given the fact that the statute has no guidance, you defined “monopoly” the best you could. As you said, a monopoly is any company that has grown in economic power so that it can reduce the supply and increase the price. Is it a monopoly if it can, or a monopoly if it does? What if a company is large enough to do these anti-competitive steps but never does it? Is that company a “monopoly,” and therefore the target of government action?
Incipiency: A Pre-Crime Applied to Monopolistic Practices
Ryan Young: That question has never been definitively answered. It’s been answered differently in different cases. Usually, it is based on past actions. The Justice Department generally doesn’t have a department of pre-crime like you’d see in science fiction movies like Minority Report. But at the same time, there is an actual antitrust legal term called “incipiency,” where if a judge or a regulator sees the conditions in the market being such that they might in the future be possible conditions for monopoly, then they can act, and that is called “incipiency.” That has been invoked rarely, but it happened back in the 1950s and 1960s.
Bob Zadek: Just imagine that in federal criminal law there was a statute that said if an individual has a higher than average likelihood of committing a crime, he can be arrested. Though the world will be safer if we get rid of the 10% of the people who are more likely than others to commit crimes, could we tolerate that even for a minute? Well, of course we could not. Yet we have federal law, that for the past130 years has said that the mere power to do a bad act is a reason to break you up and take your enterprise apart. Am I exaggerating or is that the current and historical state of antitrust law in America?
Ryan Young: That impulse exists. It ebbs and flows, and becomes weaker and stronger over time, which actually leads to a much bigger problem, which is uncertainty. I had mentioned that there are few, if any, bright line definitions of terms like “monopoly,” that anyone can point to that applies to in order to predict incipiency. There is no existing standard for when that might be or might not be legally permissible.
Basically, antitrust policy shifts with the political winds.
It was very active in the 1960’s. It was pulled back in the 1970’s after the Microsoft case.
Now it appears to be on another upswing. This has nothing to do with the merits of the matter or the company’s at hand. It has to do with politics rather than actual market or legal conditions. And this uncertainty is a major problem for long term investment and future innovation.
Bob Zadek: Ryan, you said this has nothing to do with the merits of the matter. I would point out that nothing in antitrust law has anything to do with “the merits of the matter.” Since we have a two page statute with very vague terms with no guidance such as “monopoly,” the courts are given a blank slate to apply the accepted standard of the “rule of reason.” This means that a judge can be on sound legal footing by applying antitrust law in a decision that is less likely to be overturned on appeal. Essentially, a judge at the trial level can apply his or her rule of reason to cause economic havoc in the marketplace.
So we have a concept that is purely economic but its operation is 100% political. Thus, it brings us to the present time, where in the political battle for the Democratic nomination, we have the subject of breaking up big-tech. Shortly after this show and for the rest of the political campaign until a president is elected, you and your colleagues who study antitrust legislation will be the most sought after dinner speakers, the rockstar of political commentary, because there will be so much discussed about antitrust legislation.
How does Antitrust Apply to Big Tech?
Bob Zadek: In big-tech the product is often given away for free and there is an unlimited supply. So, if we hearken back to when you said the danger of monopoly is to reduce supply and increase the price, it does not really follow. How in the world can antitrust legislation and the concept of breaking up big tech coexist?
Ryan Young: There are lots of areas where very creative minds are attacking the issue. Frankly it is hard to undercut zero-price. So, for example, if the company is based on a revenue model where it sells ads or charges money for services rendered, there’s an argument that Google and Amazon are taking away advertising revenue from other sources such as newspapers and are dominating the ad-serving market now. So that is their monopoly, as opposed to social networking or online retail. That’s one area of attack. I don’t think it necessarily is relevant to consumer welfare but that is a common line of attack these days.
The Issue of Harm to Consumers
Bob Zadek: The test in antitrust legislation, of whether a company is guilty of violating federal antitrust legislation, is the effect on consumers. Isn’t antitrust legislation essentially the mother of all consumer protection statutes, and therefore the test is only asks whether the behavior harms or hurt consumers? If that is the test, how could it harm or hurt? How could the behavior of Big Tech hurt consumers?
Ryan Young: That is a good question, especially about the antitrust as consumer welfare policy. Does it help consumers or not? We talked earlier about the rule of reason standard, so antitrust policy is whatever the judge decides is best and reasonable in a given case. It has never been formally codified in a predictable way, but antitrust jurisprudence has for a long time been following the consumer welfare standard, under which big isn’t necessarily bad, but if big is doing consumer harm, that is when antitrust regulators can and should step in. That has been the dominant school of thought for most court cases since the 1980s or so. It has never been formalized and it could turn on a dime as soon as the next big antitrust case comes about. It could be a very slippery slope if one judge and one decision decides next week to change that.
Bob Zadek: I think that the animus against big tech is not because consumers are harmed, it is on these peripheral and political issues that they have their thumb on the scales in terms of providing information to the public. They bar certain types of information. The conservatives have been complaining that the algorithms used by big tech to allow information is tilted towards the left.
There is no real proof of that. It is all anecdotal and I don’t have any idea who is right and who is wrong. But the issue of privacy and exposure to ideas is kind of what creates a lot of anger towards the tech. But that has nothing to do with “monopoly.” After all, how could any entity have a monopoly on information available to anybody on the planet when we have more access to information now than ever before in the history of humankind in the world?
So the issue of adjusting the algorithms to affect information has nothing to do with pure antitrust policy, does it?
Ryan Young: Well, I think, especially on the right, the current antitrust push is not economic or consumer oriented, it is personal. President Trump has a personal beef with Amazon founder, Jeff Bezos, in part because he owns the Washington Post, which has been critical of President Trump. He said that other companies such as Time Warner, which is the parent of CNN, also has possible antitrust concerns going forward because of their political coverage of the president. So here you’re seeing antitrust policy being wielded as a potential weapon for competition unrelated reasons. This kind of mission creates something that the left and the right should stop doing and watch out for.
The Argument for Antitrust Regulation: A Difficult One to Make
Bob Zadek: You have studied antitrust legislation going back to the first major statute, the 1890 statute, The Sherman Act. Tracing the history of antitrust legislation, give us examples of when that statute, when applied, accomplished an improvement in the marketplace as opposed to hurt the market by destroying bigness per say, helping competitors rather than consumers. Make the case if you can for effective antitrust legislation.
Ryan Young: It is very difficult to make. In fact, I’d argue that it is impossible to make. The Standard Oil case centered on a company that was continually cutting its prices and increasing its supply, making its product more available to consumers, as well as cheaper. At the same time when antitrust cases were going on, there was a major shift in the oil market. The electric light was displacing the Gaslamp. Standard Oil made its name providing fuel for kerosene lamps. That market was killed by Thomas Edison, and Standard Oil was starting to face market share decline along with this.
But then something else emerged: The automobile. All of a sudden there was rising demand for gasoline. Standard Oil had to innovate and change its policy to supply what consumers wanted. Standard Oil had to adapt to consumers, not the other way around.
So that antitrust case was frankly a waste of time. There was the IBM case in the 1960s that lasted for about 13 years, by which time the government decided to drop the case altogether because the technological issue at hand had long since become obsolete. This is a common theme in the tech industry. Then there was the big Microsoft case, which is the most recent major case back in the late 1990s. That case was mainly over the fact that Microsoft included a free browser in its Windows operating system.
That browser, Internet explorer, has since been supplanted by other browsers from Google’s Chrome to Netscape to Firefox, that can be downloaded for free using Microsoft’s own browser. So that case turned out to sizzle ended up in a settlement, neither victory nor defeat for either side. So really, looking at the long history of major cases, there has not been a single one I would argue was positive.
Bob Zadek: What about AT&T and Bell Labs?
Ryan Young: That is a good question. Frankly, Bell Labs and AT&T were government-supported monopolies. This is the only kind of monopoly that can endure so the government was right to break it up, but it was wrong to have protected that monopoly in the first place. It was righting a wrong rather than affirmatively protecting consumer welfare.
Bob Zadek: Ryan makes an important point that was made earlier by Milton Friedman. He pointed out that the only monopoly that has any kind of legs to it that can survive the passage of time and competition is a monopoly created by or supported by the government. Ryan mentioned in his introductory comments, The East India Trading Company, a British monopoly. Their tea, you may recall, was thrown into Boston harbor during the so-called Boston Tea Party. That was a governmental monopoly. So, governmental monopolies have governmental support and protection and they survive, but monopolies that are created by the skill of the management of the company never survive for all that long.
One of my very first shows discussed the story of the largest retailer in the world in 1960, the Atlantic and Pacific Trading Company, the Walmart of its day. They do not exist today. The market is in many ways a cruel place if you want longevity, certainly it’s almost impossible to live in a monopoly environment for very long because if you are making disproportionate profits, that will draw competitors like bees to honey.
Can Monopolies Exist Without Government Support
Bob Zadek: So Ryan, the marketplace itself shows us that monopolies which are lawfully created don’t really have legs. It just draws too much competition. Isn’t that the case?
Ryan Young: That’s right. And further to your point, there are competitive abuses all over the broader economy, which is why antitrust policy exists. People see these problems and they want to fix them. The trouble is that the tool is ill-suited to the task, because a lot of the times, whether the policy is an occupational license that restricts entry by new competitors or other barriers to entry, fees, taxes, building permit issues, etc. are the real barriers to entry that prevents entrepreneurs from entering the market and either putting up a viable front against a competitor or evolving a new way to do business or a new product entirely that never existed before. Those are the real threats to competition. So competition policy is important, but maybe not so much in the Sherman Act and Clayton sense. You don’t have to teach the grass to grow but you do have to take the rocks off the lawn.
Antitrust: Bipartisan and Public Support
Bob Zadek: You have pointed out in our conversations that antitrust legislation is bipartisan. There is a surprising agreement at the federal level of how to apply antitrust policy with Democrats and Republicans. Can you comment on whether the ballot box gives us a clear choice when it comes to antitrust policy?
Ryan Young: The Constitution essentially sets up America as the world’s largest free trade zone at the time. That was an important way to eliminate monopoly abuses, not so much by the private sector, but by the states. One of the purposes of the Constitution to get rid of those monopolies. As far as how the ballot box can address it, that is a much trickier issue because public opinions favor an active antitrust regulation approach. In the long run, that’s what we’ll get even though that tends to be economically harmful, especially for consumers. In the long run what the people want, they get, good and hard. That’s how democracy works. The point is how we can steer policymakers and the public to embrace innovative dynamism to realize that the true source of the restrictions on competition and monopoly abuses do not come from Amazon or Facebook, but from Washington.
Choosing one “Bigness” over another
Bob Zadek: The fastest growing monopoly is the monopoly in political power that is being ceded from 50 competitors for political power, i.e. the states. It is being ceded upstream to Washington as power devolves from the states to the federal government. People who are afraid of “bigness” per se and who have this somewhat automatic knee jerk fear of bigger anything, look up to big government to save them from bigness. So using bigness to save us from bigness is kind of fuzzy thinking. You made a wonderful point, which I had never thought about before. The formation of the federal government in 1788 was, as you have pointed out, done because the states were charging tariffs to move goods from one state to another.
The founders felt that we could not grow as an economic powerhouse unless we allowed for free trade between the states. So we proceeded the EU by a couple of hundred years and the EU is trying to accomplish with their free trade zone, what we accomplished in 1788. One can only ask what took them so long.
Proponents of Antitrust: A Case of the Baptist and the Bootlegger
Bob Zadek: As to bigness, I think you have made the point more than once during our show, and perhaps you can reinforce it, that antitrust legislation seems to have its roots in the fear of bigness. In 1890, the antitrust movement of Teddy Roosevelt, was not done in response to any consumer abuse.
The consumers in the marketplace weren’t being harmed at the time. You have pointed out in your writing that antitrust legislation is done to protect competition, and not the competitors. Can expand upon whether antitrust legislation was ever used to protect a clear harm to consumers?
Ryan Young: In a lot of ways antitrust began and still is to this day, as a confluence of two separate things. It began as special interest legislation to protect competitors rather than competition. 95% of all antitrust lawsuits are brought not by the Justice Department or the Federal Trade Commission, but by competitors trying to take down their other competitors. They’re trying to advantage themselves rather than preserve the larger market process. So one dynamic is that antitrust legislation as special interest legislation. The other dynamic is basically public sentiment.
People fear the unknown. They see big as bad. A lot of times they have good reasons for doing so. Sometimes they are misguided but their heart is in the right place. So what you have is what is called a baptist and bootlegger dynamic, where you might have both a moralizing baptist preacher and a shady bootlegger both favoring a liquor prohibition on Sundays. The preacher does not want people drinking on the Lord’s Day, and the bootlegger enjoys a nice, very lucrative monopoly on Sundays. You have that same Baptist and bootlegger dynamic in antitrust regulation. You have companies who want to pad their bottom line even if they have to do so unfairly amongst people who genuinely feel like reigning in the big guy and saving David even though Goliath would be good for consumers.
Bob Zadek: So, it is the biblical David versus Goliath that drives antitrust legislation, not the fear that Goliath was a cruel person. He was just bigger than David. He didn’t do anything wrong. He was just bigger.
There’s an interesting parallel here between antitrust and occupational licensing. Occupational licensing, requiring a license to be a cosmetologist, for example, is not done to protect the public. There is nobody who has died because of a bad hair coloring. It is done to protect existing cosmetologists from competition. So much of this legislation is what economists call “rent seeking.” Using the government to give a competitor a market advantage. That is the ugly underbelly of antitrust legislation.
A Sole Case of Good Outcomes?
Bob Zadek: Has there ever been even one case of note where it can be said that successful antitrust legislation actually made economic life better? Or is it always the case that antitrust legislation produces a result that’s worse?
Ryan Young: I can only think of one example and that had to do with tariffs rather than a specialized Sherman Act –Clayton Act antitrust legislation. Even then it turned out to have been a false hope. What happened was in the 1890s, there was a protective tariff for this infant industry that was still growing and trying to find its sea legs against some very tough international competition. Washington put up a tariff that helped this industry to grow and then the tariff was later removed.
An economist named Doug Irwin, who will probably win the Nobel Prize sometime in the next decade, looked at the matter and he found that, yes, this did help the industry reach maturity probably about a decade faster than it would have under normal market conditions.
So in this case, competition policy, stacking the deck in favor of one competitor over others, helped one of the competitors, but the cost of doing so actually exceeded the benefits. So it was a net negative for the economy and a net negative for consumers.
So, people who cite that case as a positive example are simply seeing the seen but not the unseen. They see the visible phenomenon of one company being helped, but at the same time, they miss out on the larger costs to the rest of the economy who had to fund that companies growth at their own expense.
Amazon: A Monopoly or Not?
Bob Zadek: There’s one important concept I want our audience to think about. Even defining what monopoly means is difficult. The statute gives us no guidance. Is Amazon a monopoly? How can we define the marketplace in which Amazon operates to show that Amazon does have market dominance or does not have market dominance, depending on the use of the term “monopoly.”
Use Amazon as a test to show how to squirrely the concept of dominance is of a particular market.
Ryan Young: That is a textbook example of what I call the “relevant market fallacy.”
What is Amazon’s relevant market? Is it online retail, which they might capture as much as a third or a half of? Is it retail in general, which Amazon comprises about 5% of? They also do web services and cloud server hosting. Do they have a monopoly over that? What is their market share? How many competing firms are there? How large are each of them? Is Amazon the only large player against a lot of smaller players? Or are there several larger players in the market? All of these factors and more have to tie into what Amazons relevant market is.
There are so many different ways to define whatever Amazon’s growth in the market is that when there’s an antitrust case, often just relevant market is one of the biggest things that the attorneys argue about. They don’t argue about whether a company has been hurting or harming consumers, they argue about what the relevant market is, which is frankly completely arbitrary.
Facebook might might dominate social networking, for example, but as a way to spend leisure time, they compete against restaurants, spending time with friends and family, sports games, television, movies, you name it. That’s their true relevant market. You can make some more arguments about Amazon.
So, when you say that a company is dominant in its market, always ask, “What the real relevant market is here?”
Bob Zadek: Imagine you are amongst Jeff Bezos’s inner circle. You are now doing economic planning and allocating capital and you know there is antitrust legislation on the books. How in the world could you make decisions about the allocation of enormous sums of capitol feeling vulnerable that some court could break you up? I think a court could make a case for breaking up Amazon, so this adds uncertainty as a part of the planning team of Amazon. It interferes with growth decisions, and who in America wishes Amazon to be broken up so we can go back to higher prices?
Ryan, thank you so much for giving us an hour for your time this morning.