Perhaps more than at any time in its history, the Federal Trade Commission (FTC) under Chair Lina Khan has highlighted substantive rulemaking as a central element of its policy agenda. But despite a great deal of rule-related sound and fury (signifying nothing?), new final rules have yet to emerge, and do not appear imminent. This post explores some possible “whys and wherefores” that may help explain this seemingly peculiar state of affairs, and the policy implications of the commission’s recent rulemaking activity.

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Way back in May, I cracked wise about the Federal Trade Commission’s (FTC) fictional “Bureau of Let’s Sue Meta,” noting that the commission’s proposal (really, an “order to show cause”) to modify its 2020 settlement of a consumer-protection matter with what had then been Facebook—in other words, a settlement modifying a 2012 settlement—was the FTC’s third enforcement action with Meta in the first half of 2023. That seemed like a lot, even if we ignored, say, Meta’s European and UK matters (see, e.g., here on the EU Digital Markets Act’s “gatekeeper” designations; here on the Norwegian data-protection authority; here and here on the Court of Justice of the European Union, and here on the UK Competition Appeal Tribunal).

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tl;dr

Background: In the U.S. Justice Department’s (DOJ) recent suit against Google and the Federal Trade Commission’s (FTC) latest complaint against Amazon, both antitrust agencies allege these large technology firms behave anti-competitively by preventing their rivals from reaching the “scale” needed to compete effectively.

But… achieving scale or a large customer base does not, in itself, violate antitrust law. Private companies also owe no duty to allow their competitors to reach scale. For example, Google is not required to allow Bing to gain more users so that Bing’s quality can improve. Google and Amazon’s competition for users at the expense of competitors is central to the competitive process. To make an effective antitrust case, the agencies must delineate how Amazon and Google allegedly abuse their size in ways that harm competition and consumers.

KEY TAKEAWAYS

‘SCALE’ LACKS PRECISION IN ANTITRUST

Antitrust regulators often cite “scale” in recent complaints against large tech companies. Instead of throwing that particular term around loosely, the enforcement agencies should detail precisely how firms allegedly abuse scale to harm rivals. 

Does scale unfairly raise barriers to entry? Does it impose costs on competitors? In both of the cases cited above, the alleged harm is the direct costs imposed on competitors, not the firm’s scale. After all, scale can be just another way of describing the firm that produces the highest-quality product at the lowest price. Without greater clarity, enforcement agencies would be unable to substantiate antitrust claims centered on “scale.”

To prevail in court, the agencies must articulate precise mechanisms of competitive injury from scale. Broad assertions about nebulous “scale advantages” are unlikely to demonstrate concrete anticompetitive effects. 

SCALE ALONE IS NOT AN ANTITRUST HARM

It has long been recognized that simply “achieving scale” and becoming a large firm with significant market share or production capacity does not constitute an antitrust violation. No law prohibits a company from growing large through legal competitive means. The agencies know this. The FTC argues that its complaint against Amazon is “not for being big.”

While scale can potentially be abused, it also confers significant consumer advantages. Basic economic principles demonstrate the benefits of size or scale, which may allow larger firms to reduce average costs and become more efficient. These cost savings can then be passed on to consumers through lower prices. Larger firms may also be able to make more substantial investments in innovation and product development. And network effects in technology platforms show how scale can improve service quality by attracting more users. 

Scale only becomes an issue if it is leveraged to restrain trade unfairly or in ways that harm consumers. The restraint is the harm, not the scale.

PREVENTING SCALE IS NOT AN ANTITRUST HARM 

Preventing a competitor from achieving greater size and scale is not inherently an antitrust violation either. Companies routinely take business from one another through price competition, product improvements, or other means that may limit rivals’ growth. This is a normal part of market competition. 

For example, if Amazon achieves sufficient scale that allows it to offer better prices or selection than smaller e-commerce websites, that may necessarily limit those competitors’ scale. But this does not constitute an antitrust harm; it is, instead, simply vigorous competition. An antitrust violation requires the firm to take specific actions to restrain trade or artificially raise rivals’ costs. Similar arguments hold for the DOJ’s case against Google over the company paying to be the default search engine on various mobile devices. 

Unless the agencies can demonstrate precisely how a company has abused its position to undermine rivals’ scale unfairly—rather than winning business through competition on the merits—their complaints will struggle to establish antitrust liability.

COMPETITION INCREASES CONCENTRATION, WHICH MAY LOOK LIKE SCALE

Regulators often assume that large scale enables anticompetitive behavior to harm smaller rivals. Economic analysis, however, demonstrates that scale can benefit consumers and simultaneously increase concentration through competition.

Firms that achieve significant scale can leverage resulting efficiencies to reduce costs and prices. Scale enables investments in R&D, specialized assets, advertising, and other drivers of innovation and productive efficiency. By passing cost savings on to consumers, scaled firms often gain share at the expense of higher-cost producers.

As search and switching costs fall, consumers flock to the lowest-cost and highest-quality offerings. Competition redirects purchases toward scaled companies with superior productivity and lower prices stemming from economies of scale. This reallocates market share to efficient large firms, raising concentration.

Greater competition and the competitive advantages of scale are thus entirely consistent with increased concentration. Size alone does not imply anticompetitive behavior. Regulators should evaluate specific evidence of abuse, rather than assume that scale harms competition simply because it leads to concentration.

For more on this issue, see Brian Albrecht’s posts “Is Amazon’s Scale a Harm?” and “Competition Increases Concentration,” both at Truth on the Market. 

The U.S. Justice Department’s landmark antitrust case against Google has wrapped up, leaving the parties to await Judge Amit Mehta’s bench-trial decision in the matter.

But based on the arguments presented and the publicly available evidence, the government has not made its case that the company committed “monopoly maintenance.”

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The European Commission late last month published the full list of its “gatekeeper” designations under the Digital Markets Act (DMA). Alphabet, Amazon, Apple, ByteDance, Meta, and Microsoft—the six designated gatekeepers—now have six months to comply with the DMA’s list of obligations and restrictions with respect to their core platform services (CPS), or they stand to face hefty fines and onerous remedies (see here and here for our initial reactions).

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In order to promote competition in digital markets,^[1] Latin American countries should not copy and paste “solutions” from other jurisdictions, but rather design their own set of policies. In short, Latin American countries—like my own, Peru—should not “put the cart before the horse” and regulate markets that are not yet mature.

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The Biden administration’s Oct. 30 “Executive Order on the Safe, Secure, and Trustworthy Development and Use of Artificial Intelligence” proposes to “govern… the development and use of AI safely and responsibly” by “advancing a coordinated, Federal Government-wide approach to doing so.” (Emphasis added.)

This “all-of-government approach,” which echoes the all-of-government approach of the 2021 “Executive Order on Competition” (see here and here), establishes a blueprint for heightened regulation to deal with theorized problems stemming from the growing use of AI by economic actors. As was the case with the competition order, the AI order threatens to impose excessive regulatory costs that would harm the American economy and undermine competitive forces. As such, the order’s implementation warrants close scrutiny.

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It is no coincidence that ordoliberalism—the European (originally German) alternative to classical liberalism that emphasized the importance of the “social market” economy—and the New Brandeis or “neo-Brandeisian” movement, which harkens back to the Progressive Era thought of the late U.S. Supreme Court Justice Louis Brandeis, both are enjoying comebacks simultaneously. The effects of these ideological resurgences are most apparent specifically in the field of antitrust law (see here and here). But you can also see them in the broader political-economy movement to formulate an alternative to “neoliberalism” (here and here) that at least some audience find appealing.

The antitrust mainstream has long dismissed the ideas associated with these movements as populist, romantic, or naïve. Being called an “ordoliberal” was, until relatively recently, considered an epithet in Europe. And before individuals associated with their views were elevated into the U.S. antitrust establishment, gaining the attendant aura of respectability that accompanies occupying such lofty heights, the neo-Brandeisians were commonly derided as practicing “hipster antitrust.”

But these glib dismissals underestimated, at their own expense, the visceral appeal of the arguments the ordoliberals and neo-Brandeisians put forward. Ideas that had been relegated to the fringes of academia have begun to seep into the mainstream, and now threaten to upend the “neoliberal” antitrust order—all because opponents refused to take them seriously. As in the past, this trend can only be reverted through a better understanding of why these ideologies are so attractive, and why they ultimately fall flat.

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One of the most important changes in the Federal Trade Commission (FTC) and U.S. Justice Department’s (DOJ) draft merger guidelines is the abandonment of market power as the central element of merger enforcement. The “unifying theme” of the 2010 horizontal merger guidelines was that “mergers should not be permitted to create, enhance, or entrench market power or to facilitate its exercise.” The draft guidelines have dropped the unifying theme language.

The guidelines’ abandonment of enhancement of market power as the central element of merger enforcement will have profound consequences for antitrust. One consequence is that merger enforcement will no longer prioritize consumers over competitors of the merging firms. Another important consequence, however, is the loss of a limiting principle in merger enforcement. Courts recognize that enhancement of market power is a necessary element of a merger challenge under antitrust law. The U.S. Circuit Court of Appeals for the D.C. Circuit made this point clear in its 2001 FTC v. H.J. Heinz opinion when it held that “[m]erger enforcement, like other areas of antitrust, is directed at market power.” The draft guidelines have removed enhancement of market power as a necessary element of a merger case.

Read the full piece here.